Tag Archives: Taxation

Wichita property tax still high on commercial property

An ongoing study reports that property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

Click for larger.
The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, June 2017” and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita.

In Kansas, residential property is assessed at 11.5 percent of its appraised value. Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions to compute tax.)

This means that commercial property faces 2.18 times the property tax rate as residential property. The U.S. average is 1.67. Whether higher assessment ratios on commercial property as compared to residential property is desirable public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.

For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.22 percent, while the national average is 1.39 percent. The results for a $300,000 property were similar.

Of note is the property taxes on a median-valued home. In this case Wichita is a bargain, due to our lower housing prices. A home at the median value in Wichita pays $1,513 in taxes, while the nationwide average is $3,343. (The median home value in Wichita is $124,400, and for the nation, $262,772, according to this report.)

Looking at commercial property, Wichita taxes are high. For example, for a $100,000 valued property, the study found that the national average for property tax is $2,319 or 1.93 percent of the property value. For Wichita the corresponding values are $3,261 or 2.72 percent, ranking ninth highest among the 50 largest cities. Wichita property taxes are 41 percent higher than the national average, for this scenario.

For industrial property taxes, the situation in Wichita is better, with Wichita ranking near the middle of the 50 largest cities. For an industrial property worth $1,000,000, taxes in Wichita are $29,681. The national average is $32,264.

How much will this cost Wichita taxpayers?

How much, if anything, do tax abatements cost?

Someone asked a question regarding an item on the Wichita City Council agenda today: How much will this cost taxpayers?

The item in question is agenda item IV-1: Public Hearing and Request for a Letter of Intent to Issue Industrial Revenue Bonds (WAM Investments #6, LLC). 1

Attached was an article from the Wichita Business Journal previewing the matter. 2

How much do these bonds cost taxpayers? It’s important to remember that with Industrial Revenue Bonds in Kansas, cities and counties are not the lender. 3 If this company was not able to pay the bond interest or principle, the city would be under no obligation to pay. The city makes no guarantee as to repayment. Bond buyers know this.

(As an aside, the Business Journal article states: “However, using IRB financing can help the company secure a lower interest rate.” This is simply not true unless the bonds are tax-exempt municipal bonds. Those bonds have a lower interest rate because the interest income is not subject to income tax. But the IRBs considered today are not tax-exempt.)

So if the city is not lending money, and if the city is not guaranteeing repayment, do these bonds have a cost to taxpayers? The answer depends on which side of the fence you sit.

The benefit to WAM, today’s applicant, is that IRBs carry with them tax abatements. Specifically, a whole or partial exemption from paying some property taxes. Additionally, IRBs also enable escape from paying sales tax on purchases made with bond proceeds.

So one way to look at the IRBs is that they do indeed have a cost. The city, county, school district, and state will not receive tax revenue they otherwise would receive.

Supporters of this incentive make two rebuttals. One is that without the tax abatements, the project would not be built. Therefore, no tax revenue. So by abating taxes for a period of time, the project can be built, and after the abatements expire, it will be paying taxes. (For this project, the property tax abatement is for five or likely ten years, with a reduced rate of abatement in the final five.)

The second argument is that by building something, new jobs and commerce are created. These new employees and commercial activity pay taxes. The city and other jurisdictions receive more from these new taxes than they gave up in tax abatements. This is called the benefit-cost ratio. It’s computed by Center for Economic Development and Business Research (CEDBR) at Wichita State University. City documents often refer to something like a “1.57:1 benefit-cost ratio,” meaning that for every one dollar foregone in tax revenue, the city expects to gain $1.57 in other tax revenue.

There are problems with these arguments. For the first: The developer of this project says the incentives are “critical.” If true, this claim exposes a large problem, which is if taxes are so high as to block investment, how are we going to grow as a city and region? Will every project require tax incentives? If not, why do some say they need incentives, and some don’t?

Second: Remember that government says that with the new project, tax revenue will increase. But this almost always happens regardless of whether the company has received incentives. Therefore, the benefit-cost ratio calculations are valid only if incentives were absolutely necessary.

Are incentives necessary? The benefiting companies usually make their case with a lot of numbers and projections, most of which are simply guesses. Plus, there is strong incentive to not tell — to not know — the truth. Here’s why. Suppose fictional company XYZ dangles the idea of expanding its presence in Wichita, or maybe in some other city. XYZ cites incentive packages offered by other cities. Wichita comes up with millions in incentives, and XYZ decides to expand in Wichita. Question: Were the incentives necessary? Was the threat to expand elsewhere genuine? If XYZ admits the threat was not real, then it has falsely held Wichita hostage for incentives. If the city or state admits the threat was not real, then citizens wonder why government gave away so much. No one has an incentive to be truthful. 4

Back to the item on today’s agenda. How much tax revenue is foregone through the abatements? City documents in the agenda packet did not have these numbers, but a presentation made to council members did, as follows:

Value of one year 95% tax abatement ($6,000,000 at 80%)
City of Wichita: $37,240
Sedgwick County: $33,508
USD 375 (Circle public schools): $61,255
State of Kansas: $1,710
Total: $133,713

These values would apply annually for five years. If occupancy goals are met, the incentives would apply for another five years, at a lower rate. (The values above are 95 percent of the usual taxes. The rate for the second five years would be 50 percent of the usual taxes.)

(As an aside, the Business Journal should not use headlines like it did in this case: “Wichita City Council to consider $6 million in IRBs for industrial spec building.” A better headline would be something like “Wichita City Council to consider $133,713 in annual tax abatements.” That is the real economic transaction that happened today.)

But this is not all. The applicant company will almost certainly receive an exemption from paying sales tax on the building. City documents did not provide an estimate for how much sales tax might be abated, but it could be several hundred thousand dollars.


Notes

  1. Wichita City Council agenda packet for May 1, 2108.
  2. Daniel McCoy. Wichita City Council to consider $6 million in IRBs for industrial spec building. Wichita Business Journal, April 30, 2018. Available at https://www.bizjournals.com/wichita/news/2018/04/30/wichita-city-council-to-consider-6-million-in-irbs.html.
  3. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  4. For more on this, see LeRoy, Greg. The Great American Jobs Scam. Especially chapter two, titled Site Location 101: How Companies Decide Where to Expand or Relocate. The entire book may be read online at http://www.greatamericanjobsscam.com/pages/preview-book.html. A relevant excerpt: “These prisoners’ dilemma games also enable companies to create fictions about cause and effect. These fictions can be used to create public versions of how deals happened that no one can credibly contradict, because the company’s real decision-making process will never be revealed. The most important fiction to maintain, of course, is that subsidies matter in deciding where a company expands or relocates. For example, being able to send secret signals to competing cities means companies can tell contradictory stories to different cities and have no fear of being exposed. If a company really has its heart set on City A, it can tell that city that it is in the hunt, but needs to do better. Meanwhile, it can send less urgent signals to Cities B and C, even if they offered bigger packages at first. Eventually, City A offers the biggest package, and the company announces its decision to go there.”

Wichita tourism fee budget

The Wichita City Council will consider a budget for the city’s tourism fee paid by hotel guests.

If you stay at a hotel in Wichita, you’ll pay sales tax of 7.5 percent, hotel tax (transient guest tax) of 6.00 percent, and since 2015, a tourism fee of 2.75 percent. The tourism fee arises from the city’s creating of a Tourism Business Improvement District (TBID), with boundaries matching those of the city. 1 Funds collected from this fee go to Visit Wichita, the city’s visitor and convention bureau. (Of note, the TBID ordinance specifies that if the tax is itemized on hotel bills, it is to be called the “Tourism Fee.” Everyone pays, even those who are not tourists.) (Also, some hotels are in Community Improvement Districts, charging up to another 2 percent.)

Coming to Wichita for business. (Click for a larger version.)

This week the Wichita City Council will consider the budget for the use of this tourism fee revenue. 2 City documents (the agenda packet) show actual results and goals for economic impact. As can be seen in the nearby excerpt, for leisure travel in 2017, Visit Wichita claims $81,343,227 in economic impact. This figure comes from summing identifiable dollars, which comes to $20,433,737. Then a multiplier is applied to produce the economic impact. All this results in a return of investment of $53 dollars for every dollar of investment (“Media Leisure Investment”), Visit Wichita says. (This is for the “leisure” market segment only. There are separate goals and statistics for group travel, which is meetings, conventions, or sporting events.)

This data represents what is called “incremental” travel, for which Visit Wichita takes credit: “The rate of travel by those who are ‘unaware’ is considered the base rate of travel, which would have been achieved if no advertising were placed. Any travel above this base by ‘aware’ households is considered influenced — or the rate of incremental travel.” 3

As for the performance of the overall Wichita hotel market, growth is slow. Looking at growth in hotel tax collections, only two of the ten largest markets in Kansas have grown slower than Wichita. This is since January 1, 2015, which was when the tourism fee started. (Hotel tax collections collected by the Kansas Department of Revenue do not include local taxes like the city tourism fee.)

Further, if we were expecting a boost in hotel sales from the recent hosting of NCAA basketball tournament games, that didn’t happen. See Effect of NCAA basketball tournament on Wichita hotel tax revenues.

Kansas transient guest tax collections are available in an interactive visualization here.

Example from the visualization. Click for larger.


Notes

  1. City of Wichita, Ordinance No. 49-677. Available at http://www.wichita.gov/CityClerk/OrdanicesDocuments/49-677%20TBID%20Ordinance%20-%20version%204.pdf.
  2. Wichita city council agenda packet for May 1, 2018.
  3. City council agenda packet.

State government tax collections

An interactive visualization of tax collections by state governments.

Each year the United States Census Bureau collects a summary of taxes collected by each state for 5 broad tax categories and up to 25 tax subcategories. 1 I’ve collected this data and made it available in an interactive visualization.

You may recall that Kansas raised personal income tax rates in 2017 and made the new rate retroactive to January 1, 2017. But that change doesn’t seem to have affected this data. For 2016, Kansas collected $768 per person in individual income taxes, and for 2017, $799. Here’s why:

For most states, including Kansas, this data is for the fiscal year, not the calendar year. 2 New withholding tax tables were not available until June 27, 2017, just three days before the end of fiscal year 2017. 3

Click here to access the visualization.

Example from the visualization. Click for larger.


Notes

  1. United States Census Bureau. Annual Survey of State Government Tax Collections (STC). Available at https://www.census.gov/programs-surveys/stc.html.
  2. United States Census Bureau. State Government Tax Collections: 2017 Technical Documentation. Available at https://www2.census.gov/programs-surveys/stc/technical-documentation/complete-technical-documentation/statetaxtechdoc2017.pdf.
  3. Kansas Department of Revenue. New Kansas income tax withholding tables now available. Available at https://www.ksrevenue.org/CMS/content/06-27-2017-NewWHTables.pdf.

Tax benefits for education don’t increase education

Here’s evidence of a government program that, undoubtedly, was started with good intentions, but hasn’t produced the intended results.

Tax season ended last week. Taxpayers have filed for over $30 billion in credits and deductions for college expenses they paid in 2017.

Evidence now clearly shows that these credits have zero effect on college attendance. The tax credits surely make those who get them better off, but they do nothing to increase education. If their intent is to increase schooling, they are a failure.

Continue reading at The Brookings Institution article The tax benefits for education don’t increase education.

WichitaLiberty.TV: United States Senator Dr. Tom Coburn

In this episode of WichitaLiberty.TV: United States Senator Dr. Tom Coburn wrote the foreword to the book “What Was Really the Matter with the Kansas Tax Plan –- The Undoing of a Good Idea.” He’s here to tell us what went wrong, and what we need to do. View below, or click here to view at YouTube. Episode 193, broadcast April 21, 2018.

Shownotes

WichitaLiberty.TV: Kansas Senator Ty Masterson

In this episode of WichitaLiberty.TV: Kansas Senator Ty Masterson, a Republican from Andover, joins Bob and Karl to update us on happenings in the Kansas Legislature. View below, or click here to view at YouTube. Episode 192, broadcast April 14, 2018.

Shownotes

  • Senator Ty Masterson at Kansas Legislature
  • Ty Masterson campaign website
  • SB 424: AN ACT concerning education; establishing the office of education inspector general within the office of the state treasurer; providing the duties and functions thereof.
  • SB 393: Legislative committees; all votes of each legislator on motions or other action recorded in minutes.
  • SCR 1611: Making application to the U.S. congress to call a convention of the states.
  • HB 2753: Review of tax credits, tax exemptions and economic development programs.

Wichita property tax rate: Down

The City of Wichita property tax mill levy declined for the second year in a row.

Wichita mill levy rates. This table holds only the taxes levied by the City of Wichita and not any overlapping jurisdictions.
In 1994 the City of Wichita mill levy rate — the rate at which property is taxed — was 31.290. In 2017 it was 32.667, based on the city’s Comprehensive Annual Financial Report and the Sedgwick County Clerk. That’s an increase of 1.377 mills, or 4.40 percent, since 1994. (These are for taxes levied by the City of Wichita only, and do not include any overlapping jurisdictions.)

In 2016 the mill levy was 32.685, so the mill levy dropped by .018 for 2017. That’s a drop of 0.06 percent, and while small, it’s a refreshing change. It’s also the second year in a row for a decrease in the mill levy.

Wichita mill levy rates. Click for larger version.
The Wichita City Council does not take explicit action to set the mill levy rate. Instead, the rate is set by the county based on the city’s budgeted spending and the assessed value of taxable property subject to Wichita taxation.

While the city doesn’t have control over the assessed value of property, it does have control over the amount it decides to spend. As can be seen in the chart of changes in the mill levy, the city usually decides to spend more than the previous year’s mill levy generates in taxes. Therefore, tax rates usually rise.

Change in Wichita mill levy rates, year-to-year and cumulative. Click for larger version.
It’s more common for the mill levy to rise rather than to fall. In those years, the council does not take responsibility to the rise. It will be interesting to see if council members take credit for the falling mill levy this year.

An increase of 4.40 percent over two decades may not seem like much of an increase. But this is an increase in a rate of taxation, not tax revenue. As property values rise, property tax bills rise, even if the mill levy rate is unchanged.

The total amount of property tax levied is the mill levy rate multiplied by the assessed value of taxable property. This amount has risen, due to these factors:

  • Appreciation in the value of property
  • An increase in the amount of property
  • Spending decisions made by the Wichita City Council

Application of tax revenue has shifted

Wichita mill levy, percent dedicated to debt service. Click for larger version.
The allocation of city property tax revenue has shifted over the years. According to the 2010 City Manager’s Policy Message, page CM-2, “One mill of property tax revenue will be shifted from the Debt Service Fund to the General Fund. In 2011 and 2012, one mill of property tax will be shifted to the General Fund to provide supplemental financing. The shift will last two years, and in 2013, one mill will be shifted back to the Debt Service Fund. The additional millage will provide a combined $5 million for economic development opportunities.”

In 2005 the mill levy dedicated to debt service was 10.022. In 2017 it was 8.511. That’s a reduction of 1.511 mills (15.1 percent) of property tax revenue dedicated for paying off debt. Another interpretation of this is that in 2005, 31.4 percent of Wichita property tax revenue was dedicated to debt service. In 2017 it was 26.0 percent.

This shift has not caused the city to delay paying off debt. This city is making its scheduled payments. But we should recognize that property tax revenue that could have been used to retire debt has instead been shifted to support current spending. Instead of spending this money on current consumption — including economic development spending that has produced little result — we could have, for example, used that money to purchase some of our outstanding bonds.

Naftzger Park private use plans unsettled

An important detail regarding Naftzger Park in downtown Wichita is unsettled, and Wichitans have reason to be wary.

In the developer agreement regarding Naftzger Park passed on December 19, 2017, there was this: “The City and the Board will cooperate with Developers, upon Developers’ request, to create an Annual Master Calendar of private and public events for the Park, with the expectation that the Developers will have the use of the Park for certain private events.” 1 (In this agreement, “Board” refers to the Board of Park Commissioners of the City of Wichita, Kansas.)

Recently I asked the city if this master calendar had been created, or if there was a framework for determining how many private events can be held. According to the city, decisions are ongoing, and “According to Park & Recreation officials, what can be shared now is that the City will create and maintain a master calendar of events and programming. The developer will share in the programming responsibility and host several events throughout the year. Collaborating will ensure that the park is programmed well and active.”

Wichitans should not take comfort in learning this. We can easily imagine where the developer will want to have private events often, especially if homeless people continue using the park as a gathering spot, as is their right. “TGIF kickoff, tonight at Naftzger Park! Drinks and hot hors d’oeuvre! $15 to enter, free to residents of Lofts at Spaghetti Works and partners at Martin Pringle.”

Could this happen? How often could this happen? These are open questions, and we’re being asked to trust that city bureaucrats will negotiate a good deal for the entire city.

A panoramic view of Naftzger Park at winter’s end. Click for larger.

We shouldn’t trust the city to get a good deal for the average Wichitan. Even if the city strikes a deal that looks good, we should not trust the city to enforce the deal. Here’s an example to illustrate why.

In 2012 the city negotiated a deal with a private developer regarding an apartment development. As part of the deal, the city negotiated a provision that requires the apartment developer to pay “Additional Annual Rent” if certain conditions were met. To the casual observer, that might seem like a magnanimous gesture by the apartment developer. It made it look like the city was been a tough negotiator, hammering out a good deal for the city, letting citizens profit along with the apartment developer.

But the list of costs the developer could deduct before determining “additional annual rent” was broad, including the ability to contribute to reserve funds that would be owned by the developer. At the time, I observed, “We can be sure that if this project was ever in the position where it looked like it might have to remit ‘Additional Annual Rent’ to the city, contributions to these reserve funds would rise. Then, no funds paid to the city.” 2

As it turns out, the city did not enforce this agreement. It didn’t even ask for the information needed. Last year I became aware that the city did not ask for, and the developers did not produce, annual reports. 3

So might it happen that the private developments adjacent to Naftzger Park treat the park as their own? Recall that these developers have taken advantage of nearly every available program to fund their private developments. 4 Included in the list of benefits is a new benefit the city has offered only once before, to my knowledge: The city is paying the developer for parking spaces, on the theory they will be available to the public when the development does not need them.

Many of these benefits to the developer appeared only after the Wichita city manager said the development would not proceed, as the Wichita Eagle reported: “Plans to tear up and rebuild Naftzger Park downtown have been shelved indefinitely, after developers who own neighboring property pulled out of working with the city, Wichita City Manager Robert Layton said Friday [November 17, 2017].” 5 Somehow the deal was quickly revived, with even more taxpayer-funded benefits to the developer.

Should Wichitans trust the city to negotiate a good deal, and if it does, to enforce it? In my experience, the answer is no.


Notes

  1. DEVELOPMENT AGREEMENT between the CITY OF WICHITA, KANSAS, BOARD OF PARK COMMISSIONERS OF THE CITY OF WICHITA, KANSAS, SENECA PROPERTY, LLC, and SUNFLOWER WICHITA, LLC Dated as of January 19, 2018. Section 3.12. In the agenda packet for the December 19, 2017 Wichita city council meeting.
  2. Weeks, Bob. Wichita WaterWalk apartment deal not good for citizens. Available at https://wichitaliberty.org/wichita-government/wichita-waterwalk-apartment-deal-not-good-for-citizens/.
  3. Weeks, Bob. Wichita WaterWalk contract not followed, again. Available at https://wichitaliberty.org/wichita-government/wichita-waterwalk-contract-not-followed/.
  4. Weeks, Bob. Naftzger Park project details. Available at https://wichitaliberty.org/wichita-government/naftzger-park-project-details/.
  5. Lefler, Dion. Naftzger Park won’t be torn down, rebuilt after Spaghetti Works developer pulls out. Wichita Eagle, november 17, 2017. Available at http://www.kansas.com/news/politics-government/article185304103.html.

Visualization: Tax collections by the states

An interactive visualization of tax collections by state governments.

Each year the United States Census Bureau collects data from the states regarding tax collections in various categories. 1 I present this data in an interactive visualization.

The values are for tax collections by the state only, not local governmental entities like cities, counties, townships, improvement districts, cemetery districts, library districts, drainage districts, watershed districts, and school districts.

Of note: Sometimes changes made by states may not align with this data. A possible reason is that for most states this data is reported for the fiscal year, while many changes to tax law affect the calendar year. 2

By using the tabbed views, you can compare tax collections in different states. Of particular interest is the “Total by State” tab. Here you can select a number of states and compare their tax burdens. (Probably three or four states at a time is the practical limit.) This data is presented on a per-person basis.

Data is as collected from the United States Census Bureau, Annual Survey of State Government Tax Collections, and not adjusted for inflation. Visualization created using Tableau Public.

Click here to access the visualization.

Example from the visualization. Click for larger.
Example from the visualization. Click for larger.
Example from the visualization. Click for larger.


Notes

  1. United States Census Bureau. Annual Survey of State Government Tax Collections (STC). Available at https://www.census.gov/programs-surveys/stc.html.
  2. “The tax revenue data pertain to state fiscal years that end on June 30, 2017 in all but four states (NY, TX, AL, MI). Amounts shown for these four states reflect the different timing of their respective fiscal years, which were the 12-month periods ending on March 31, 2017 for New York, August 31, 2017 for Texas, and September 30, 2017 for Alabama and Michigan.” United States Census Bureau. State Government Tax Collections: 2017 Technical Documentation. Available at https://www2.census.gov/programs-surveys/stc/technical-documentation/complete-technical-documentation/statetaxtechdoc2017.pdf.

WichitaLiberty.TV: What Was Really the Matter with the Kansas Tax Plan

In this episode of WichitaLiberty.TV: Dave Trabert of Kansas Policy Institute joins Bob and Karl to discuss his new book What Was Really the Matter with the Kansas Tax Plan –- The Undoing of a Good Idea. View below, or click here to view at YouTube. Episode 186, broadcast March 3, 2018.

Shownotes

What Was Really the Matter with the Kansas Tax Plan

From Kansas Policy Institute.

What Was Really the Matter with the Kansas Tax Plan

New Book Outlines Tax Lessons from Kansas “Experiment”

Tax relief opponents have repeatedly pointed to the 2012 Kansas tax plan as their primary example of why tax cuts do not work. But, other states like North Carolina, Indiana, and Tennessee contemporaneously, and successfully, cut taxes. What was different about the Kansas experience?

The answer to that question is multi-dimensional according to a new book from Kansas Policy Institute, entitled What Was Really the Matter with the Kansas Tax Plan — The Undoing of a Good Idea. The book covers the six years between the conception of Brownback’s tax cuts in 2011, the tax package being signed into law in 2012 and later repealed with the largest tax hike in state history in 2017. It documents the many mistakes that occurred, a toxic political undercurrent, and several unrelated economic circumstances that negatively impacted the budget and multiple misconceptions along the way.

Author and KPI president Dave Trabert says, “Much of what went wrong was avoidable. We hope citizens and legislators across the nation can learn from the mistakes made in Kansas as they strive to create the best path forward for everyone to achieve prosperity with lower taxes.”

The final chapter of the book is “Lessons Learned” and includes these big lessons:

  1. Don’t cut revenue and increase spending.
  2. Explain why tax relief is necessary (i.e., what are the consequences of not reducing the tax burden).
  3. Develop a comprehensive plan to balance the budget on less tax revenue, with room for the unpredictable but inevitable misfortunes (like plummeting oil and farm commodity prices).
  4. Have the right systems in place, including performance-based budgeting and a reliable revenue estimating process.

To ensure that lawmakers have this information as they work in statehouses around the country, nearly 8,000 complimentary copies are being distributed to every state legislator across the country in partnership with The Heartland Institute.

Danedri Herbert, an experienced journalist currently writing for the online publication “The Sentinel,” co-authored the book and former U.S. Senator Tom Coburn of Oklahoma wrote the Foreword. Coburn writes, “This is a very important book, not only for state and national legislators who try to represent citizens instead of special interests, but also for taxing and spending watchdogs in the press and those involved with good government citizen activist groups.”

What Was Really the Matter with the Kansas Tax Plan is published by Jameson Books, Inc. and copies will be available on Amazon.

Trabert concludes, “Kansas could have successfully cut taxes as other states have done. The undoing of a very good idea—allowing citizens to keep more of their hard-earned money—gets to the crux of the serious state and national challenges we face: policy takes a back seat to politics. The efforts of many elected officials are not on solving problems in ways that create the best path forward for all Americans to achieve prosperity, but on maintaining and consolidating power.”

In Wichita, three Community Improvement Districts to be considered

In Community Improvement Districts (CID), merchants charge additional sales tax for the benefit of the property owners, instead of the general public. Wichita may have an additional three, contributing to the problem of CID sprawl.

This week the Wichita City Council will hold public hearings considering the formation of three Community Improvement Districts. In Kansas Community Improvement Districts, merchants charge additional sales tax for the benefit of the property owners, instead of the general public. 1

Each of these CIDs will charge customers additional sales tax, with a cap on the amount that may be raised, and a separate cap on the length of the CID. For the three projects this week, here are the details: 2

Delano Catalyst CID: 2% additional tax, raising up to $3,000,000, up to 22 years
Spaghetti Works CID: 2% additional tax, raising up to $3,118,504, up to 22 years
Chicken N Pickle CID: 1.5% additional tax, raising up to $2,300,000, up to 15 years

All these CIDs are of the pay-as-you-go type, which means the city is not borrowing money that would be repaid by the CID tax proceeds. Instead, the CID tax proceeds are periodically sent to the landowners as they are collected. The city retains a 5% administrative fee.

Additionally, two of these CIDs earmark 10% of the CID tax collections for public benefits, which are extra park maintenance for the Spaghetti Works CID, and street improvements for the Chicken N Pickle CID. While these earmarks may seem magnanimous gestures, they directly work to the developers’ benefit. For Spaghetti Works, Naftzger Park is, in effect, becoming the front yard to a development. It will be of great benefit for it to be maintained well, especially considering that the developers will be able to close the park for private events. For the Chicken N Pickle CID, the street improvements the CID will fund are usually paid for by special tax assessments on the nearby landowners, which in this case is the Chicken N Pickle. This is a large savings.

By the way, none of the applications for these economic development incentives pleads economic necessity. They simply want more money, and are willing to let government take the blame when customers notice they’re paying 9% or 9.5% sales tax in these districts.

Of additional note: The Delano and Spaghetti Works developments are receiving many millions of taxpayer-provided subsidy from other economic development incentive programs. 3 4

It will be interesting to see how the council’s two new members, Brandon Johnson (district 1, northeast Wichita) and Cindy Claycomb (district 6, north central Wichita), will vote in these matters. As Progressives, we might expect them to be opposed to higher sales taxes, which affect low-income households disproportionally. We also might expect them to be opposed to targeted tax incentives for the “wealthy,” such as the now-defunct exemption on pass-through business income in Kansas. Here, they are asked to vote on a highly targeted tax incentive that will benefit identifiable wealthy parties.

Issues regarding CID

Perhaps the most important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? But the premise of this question is not accurate, as it is not the merchants who receive CID funds. The more accurate question is why don’t landlords raise their rents? That puts them at a competitive disadvantage with property owners that are not within CIDs. Better for us, they rationalize, that unwitting customers pay higher sales taxes for our benefit.

Consumer protection
Customers of merchants in CIDS ought to know in advance that an extra CID tax is charged. Some have recommended warning signage that protects customers from unknowingly shopping in stores, restaurants, and hotels that will be adding extra sales tax to purchases. Developers who want to benefit from CID money say that merchants object to signage, fearing it will drive away customers.

State law is silent on this. The City of Wichita requires a sign indicating that CID financing made the project possible, with no hint that customers will pay additional tax, or how much extra tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless. See Wichita community improvement districts should have warning signs and In Wichita, two large community improvement districts proposed. In the latter, future Wichita Mayor Jeff Longwell argued that signs showing different tax rates for different merchants would be confusing. Council Member Sue Schlapp said she supported transparency in government, but informing consumers of extra taxes would make the program “useless.”

Eligible costs
One of the follies in government economic development policy is the categorization of costs into eligible and non-eligible costs. The proceeds from programs like CIDs and tax increment financing may be used only for costs in the “eligible” category. I suggest that we stop arbitrarily distinguishing between “eligible costs” and other costs. When city bureaucrats and politicians use a term like “eligible costs” it makes this process seem benign. It makes it seem as though we’re not really supplying corporate welfare and subsidy.

As long as the developer has to spend money on what we call “eligible costs,” the fact that the city subsidy is restricted to these costs has no economic meaning. Suppose I gave you $10 with the stipulation that you could spend it only on next Monday. Would you deny that I had enriched you by $10? Of course not. As long as you were planning to spend $10 next Monday, or could shift your spending from some other day to Monday, this restriction has no economic meaning.

Notification and withdrawal
If a merchant moves into an existing CID, how might they know beforehand that they will have to charge the extra sales tax? It’s a simple matter to learn the property taxes a piece of property must pay. But if a retail store moves into a vacant storefront in a CID, how would this store know that it will have to charge the extra CID sales tax? This is an important matter, as the extra tax could place the store at a competitive disadvantage, and the prospective retailer needs to know of the district’s existence and its terms.

Then, if a business tires of being in a CID — perhaps because it realizes it has put itself at a competitive disadvantage — how can the district be dissolved?

The nature of taxation
CIDs allow property owners to establish their own private taxing district for their exclusive benefit. This goes against the grain of the way taxes are usually thought of. Generally, we use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from participating in — and benefiting from — police protection.

But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district.


Notes

  1. Weeks, Bob. Community improvement districts in Kansas. Available at https://wichitaliberty.org/kansas-government/community-improvement-districts-kansas/.
  2. Wichita City Council Agenda Packet for January 9, 2018. Agenda items IV-1, IV-2, and IV-3.
  3. Weeks, Bob. Naftzger Park project details. Available at https://wichitaliberty.org/wichita-government/naftzger-park-project-details/.
  4. Weeks, Bob. Delano catalyst site. https://wichitaliberty.org/wichita-government/delano-catalyst-site/.

WichitaLiberty.TV: Radio Host Andy Hooser

In this episode of WichitaLiberty.TV: Radio Host Andy Hooser of the Voice of Reason appears with Bob Weeks to discuss issues in state and national political affairs. View below, or click here to view at YouTube. Episode 177, broadcast December 23, 2017.

Shownotes

Spirit expands in Wichita

It’s good news that Spirit AeroSystems is expanding in Wichita. Let’s look at the cost.

While it is good news that Spirit AeroSystems is expanding its Wichita operations, it is not without cost to several governmental agencies. Here’s a summary of what is publicly available so far.

First, a new “entity” will be formed in order to facilitate the construction and ownership of a new building on the Spirit campus. 1

This entity will be funded with $7 million in cash from Sedgwick County and $3 million cash from the City of Wichita. Further, the city will forgive Spirit’s debt of $3.5 million associated with a water project. 2

Second, through the mechanism of Industrial Revenue Bonds,3 Spirit receives a property tax exemption of one hundred percent for five years, with renewal for another five years if goals are met. Despite the use of the term “bond,” no governmental entity is lending money to Spirit, and no one except Spirit is liable for bond repayment.

Third: The bonds confer another benefit to Spirit: According to city documents, “IRBs will, pursuant to STATE law, provide for a sales tax exemption on materials and labor subject to sales tax necessary to construct and equip FACILITY.” 4 City documents give no dollar amount is given for the sales tax exemption. But in the analysis conducted by Center for Economic Development and Business Research at Wichita State University these figures are used for the amount of sales tax exemption: City of Wichita: $279,445. Sedgwick County: $137,354. State of Kansas: $3,120,000. Total: $3,536,799. 5

Fourth, this project will undoubtedly qualify for PEAK, or Promoting Employment Across Kansas. This is a State of Kansas program that allows companies to keep the state income taxes their employees pay through paycheck withholding, less a small fee. 6 It isn’t possible to know in advance how much PEAK benefit the company will receive, because the individual circumstances of each employee determine the income tax withheld. The following calculation, however, gives an indication of the magnitude of the amount of PEAK benefits Spirit can expect:

$56,000 annual salary / 26 pay periods = $2,154 per bi-weekly pay period. For a married worker with two children, withholding tables show $55 to be withheld each pay period, or $55 * 26 = $1,430 per year. For 1,000 employees, the PEAK benefit is $1,430,000 per year. 7

There may be other programs that this project qualifies for.

Are these incentives necessary?

Taxpayers might be wondering if these incentives are necessary for Spirit to be able to expand its operations, and for it to select Wichita as the site. Spirit says it has received generous offers from other locations. If so, Spirit could do itself a favor by revealing these offers. So too, could other Wichita companies that have claimed intense courtship by other cities. But the economic development industry operates in darkness.

One thing that would also increase the credibility of economic development efforts is for Wichita Mayor Jeff Longwell (and others) to stop making claims of “no more cash incentives.” The city explicitly offers cash in this proposal. The city also offers to cancel a debt, which is just like cash. Forgiveness of future taxes is as good as cash, too.

For years we’ve been told that Wichita needs to diversify its economy, meaning that it relies too heavily on the aircraft industry. This expansion by Spirit will undoubtedly heighten that concentration. We should not turn down this expansion of our local economy. But the incentives that are offered have a cost, and that cost is paid — partly — by other business firms in other industries that are trying to grow in Wichita.

Many will undoubtedly cheer the Spirit announcement as an economic development win on a large scale. It will add many jobs. But the Wichita-area economy is so far behind it will take much more growth than this to catch up with the rest of the nation. In fact, the Wichita-area economy shrank last year. 8 And while many cheer our low unemployment rate, sole reliance on that number hides a shrinking labor force. 9

Also, let’s be appropriately humble when boasting about this expansion. A region’s largest employer deciding to expand in the same city: This is the minimum level of competence we ought to expect from our economic development machinery.

Further, economists caution us to look beyond any single project, no matter how large, and consider the entirety of the local economy. As economist Art Hall has noted, large-employer businesses have no measurable net economic effect on local economies when properly measured. “The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.” 10

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

Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.


Notes

  1. “The CITY, COUNTY and COMPANY would each take action to establish a new legal entity separate and apart from the CITY, COUNTY and COMPANY for development of the PROJECT (the “ENTITY”) which will take such form as the PARTIES may approve.” Memorandum of Understanding for Project Eclipse, Section I.A. Contained within agenda packet for Wichita City Council meeting for December 13, 2017.
  2. “The COUNTY participation of $7 million US is anticipated to be available cash; the CITY participation would consist of cash in the amount of $3 million US, forgiveness of $3.5 million US in future COMPANY payments associated with the CAPITAL COMPONENT and an agreement to make additional capital improvements relating to the WATER AGREEMENT in an approximate cost of $1 million US.” Memorandum of Understanding for Project Eclipse, Section I.B
  3. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  4. Memorandum of Understanding for Project Eclipse, Section I.3.E
  5. Project Eclipse – ROI calcs plus author’s calculation. Available at https://drive.google.com/file/d/1uGaxTgrctYpBjkG7PR6bP81SxgFjpzjo/.
  6. Weeks, Bob. PEAK, or Promoting Employment Across Kansas. Available at https://wichitaliberty.org/kansas-government/peak-promoting-employment-across-kansas/.
  7. Kansas Department of Revenue Withholding tables. Available at https://www.ksrevenue.org/pdf/whtables2017.pdf.
  8. Weeks, Bob. Wichita economy shrinks. Available at https://wichitaliberty.org/economics/wichita-economy-shrinks/.
  9. “It is possible that the unemployment rate falls while the number of people employed falls or rises slowly. This is the general trend in Wichita for the past seven years or so.” Weeks, Bob. Wichita employment up. Available at https://wichitaliberty.org/wichita-government/wichita-employment-up/.
  10. William F. Fox and Matthew N. Murray, “Do Economic Effects Justify the Use of Fiscal Incentives?” Southern Economic Journal, Vol. 71, No. 1, 2004, p. 79. A

Kansas tax receipts

News about Kansas tax receipts for November 2017, along with an interactive visualization.

Following is a press release from the Kansas Department of Revenue regarding November 2017 tax receipts. For an interactive visualization of this data, see Visualization: Kansas tax receipts.


December 1, 2017
Tax receipts show promise of improved economy

TOPEKA–The state has collected $258.75 million over last fiscal year at this time, totaling over 11 percent growth in collections according to data from the latest revenue report released Friday.

So far this fiscal year that started in July, the state has collected $1.09 billion in total individual income tax, which amounts to $176.74 million over last year. In the same time, sales tax collections total $985.71 million, putting it $41.64 million over last year or over 4 percent growth. Corporate income tax continues the multi month trend of outperforming the previous year, hitting a value of $30.51 million over last year’s cumulative collections.

“Sales tax receipts have reached what appears to be stable growth above last year’s collections,” Revenue Secretary Sam Williams said. “Individual income tax collections are also above last year by a wide margin, but it’s difficult to distinguish the impact of the recent tax increase versus economic growth, and we won’t be able to discern that until April.

November tax receipts totaled $463.50 million, which is $62.23 million over November last year. Individual income tax collections totaled $207.62 million for the month, while sales tax revenue came in at $192.63 million. Corporate income tax totaled $379,518.

Example from the visualization. Click for larger.

WichitaLiberty:TV: Ron and Susan Estes

In this episode of WichitaLiberty.TV: United States Representative Ron Estes joins Bob Weeks to talk about the tax bill, his op-ed in the Wall Street Journal, and Susan Estes tells us what Mrs. Smith does when Mr. Smith goes to Washington. View below, or click here to view at YouTube. Episode 174, broadcast November 25, 2017.

Shownotes

PEAK, or Promoting Employment Across Kansas

PEAK, a Kansas economic development incentive program, redirects employee income taxes back to the employing company.

An economic development incentive program in Kansas is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees.

Flow of tax dollars under normal circumstances, and under PEAK.
Flow of tax dollars under normal circumstances, and under PEAK.
PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values. (These illustrations are based on 2016 tax rates.)

There are requirements regarding the minimum number of jobs to be created or retained. Also, companies must pay wages greater than or equal to the median county wage. 1

Then, the Secretary of Commerce has “discretion to approve applications of qualified companies and determine the benefit period.”

Legislators and public officials like programs like PEAK partly because they can promote these programs as self-financing. That is, the state isn’t subsidizing a company. Instead, the company is paying its own way with its own taxes (actually, its employees’ taxes). PEAK supporters say the state is not sending money to the company. Instead, the company is just holding on to 95 percent of its employees’ withholding taxes instead of sending the funds to the state.

Schemes like PEAK call into question one of the fundamental principles of taxation: That tax funds be used to fund the operations of government, not to enrich one particular person or company. But continually, states and local government use programs like PEAK — and others like tax increment financing (TIF) districts, Community Improvement Districts (CIDs), Industrial Revenue Bonds, and others — that turn over a public function to private interests.

Illustration of a shortfall under PEAK
Illustration of a shortfall under PEAK
Here’s another consideration regarding the PEAK program. The amount of money withheld from a worker’s paycheck is not the same as the amount of tax the worker actually owes the state. Withholding is only an approximation, and one that is biased in favor of the state. Many Kansas workers receive an income tax refund from the state. This is in recognition that the sum of the withholding taxes paid by a worker is larger than the actual tax liability. Therefore, the state is returning money that the state was not entitled to.

Now, what about workers who are employed at a company that is in the PEAK program and who receive a state income tax refund? Their withholding taxes — 95 percent, anyway — have already been given back to their employer.

So: What is the source of the money used to pay these refunds? How much money is paid in refunds to employees working at PEAK-participating companies?

We should note that the funds don’t come from the PEAK company’s employees, as the employees receive credit for all their withholding taxes, even though 95 percent never contributed to the state treasury.

Inquiry to the Department of Revenue revealed that there are no statistics on actual income tax liability of PEAK employees vs. the amount of withholding tax credited to that employee that was retained or refunded to the PEAK employer. The Department of Commerce referred inquiries to the Department of Revenue.

If we wanted to know how much money was paid in refunds to PEAK-company employees, I believe we would need to examine the account of each affected employee. I’m sure it’s not possible to come up with an answer by making assumptions, because the circumstances of each taxpayer vary widely.

Whatever the amount, it represents state tax revenue being used to fund an economic development incentive program that is pitched as being self-funded.


Notes

  1. “PEAK requires the qualified company to commit to creating five new jobs in non-metropolitan counties or ten (10) new jobs in the metropolitan counties of Shawnee, Douglas, Wyandotte, Johnson, Leavenworth and Sedgwick over a two-year period. The qualified company must also pay wages to the PEAK jobs/employees, that when aggregated, meet or exceed the county median wage or North American Industry Classification System (NAICS) average wage for their industry.” Kansas Department of Commerce. Promoting Employment Across Kansas (PEAK) Program. Available at http://kansascommerce.gov/141/Promoting-Employment-Across-Kansas-Progr.

Kansas hotel tax collections

Kansas hotel guest tax collections presented in an interactive visualization.

Cities and counties in Kansas may levy a transient guest tax collection on hotel guests. It is sometimes called a bed tax or guest tax. The tax is collected as a percentage of total room revenue, not the number of rooms or the rate charged for rooms. While the Kansas Department of Revenue collects the tax, the proceeds are returned to the cities or counties, except for a two percent processing fee. In Wichita the rate is six percent.

In some cases, jurisdictions may levy additional taxes that may not be paid to the Kansas Department of Revenue. This is the case with the Wichita city tourism fee, which took effect on January 1, 2015. This tax of 2.75% is paid directly to the city1, so it doesn’t appear in KDOR figures.

Also, jurisdictions may change the tax rate. The Kansas Department of Revenue maintains a list of taxes charged. 2

The visualization has three views of data. One is a table of collections, including percent change from the previous year. A line chart shows the dollar amount of collections. A second line chart shows collections indexed to a common starting point. This is useful for comparing the relative change in guest tax collections. These line charts show data as the average of the previous 12 months.

Examples of nondisclosure.
This data does not represent all hotels in Kansas. Confidentiality rules prohibit disclosure when a jurisdiction has a small number of hotels. In the nearby example, the value “C” is reported for Sedgwick County, indicating such non-disclosure. Obviously, there are hotels in Sedgwick County. But considering hotels in Sedgwick County that are not located in cities like Wichita, the number is too small to report, based on confidentiality guidelines. Similarly, for small cities, data is probably not available to the public.

Of note, while Wichita is the largest city in Kansas, Overland Park collects the most hotel guest tax. Of the largest markets in Kansas, Wichita has experienced the least growth in hotel tax collections since 2010.

Click here to access the visualization.

Guest tax collections in largest hotel markets in Kansas, indexed change. Click for larger.


Notes

  1. City of Wichita ordinance 49-745. Available at http://www.wichita.gov/CityClerk/OrdanicesDocuments/49-745%20TBID%20Fee%20Ordinance.pdf.
  2. Kansas Department of Revenue. Transient Guest Tax Rates, Effective Dates, and Number of Active Accounts. Available at https://www.ksrevenue.org/pdf/tgratesfilers.pdf.

Kansas highway spending

A look at actual spending on Kansas highways, apart from transfers.

KDOT spending, major road programs. Click for larger.
KDOT spending, total road programs. Click for larger.
KDOT transfers. Click for larger.
KDOT funding sources, partial. Click for larger.
When we look at actual spending on Kansas roads and highways, we see something different from what is commonly portrayed. Kansas Department of Transportation publishes a Comprehensive Annual Financial Report that details spending in four categories. These figures represent actual spending on roads and highways, independent of transfers to or from the highway fund.

For fiscal year 2017, when ended June 30, 2017, spending on three categories (Maintenance, Preservation, and Modernization) was nearly unchanged from the year before, while spending on the category Expansion and Enhancement fell by 31 percent.

For these four categories — which represent the major share of KDOT spending on roads — spending in fiscal 2017 totaled $738.798 million. That’s down 14 percent from $857.133 million the year before, and up from a low of $698.770 million in fiscal 2010.

Again, these are dollars actually spent on highway programs. A common characterization of the way Kansas government is funded is called “robbing the bank of KDOT.” To the extent that characterization is accurate, there is a separate line item titled “Distributions to other state funds” that holds these values. It appears in the nearby table. A chart shows sales tax distributions from the general fund to KDOT, and transfers from KDOT.

Many also criticize Kansas government for slashing highway spending, letting our roads crumble. While total spending on these four programs has been falling (after adjusting for inflation), the decline is minor compared to the hysterical claims of those with vested interests in more government, and especially highway, spending.

Kansas law specifies how much sales tax revenue is transferred to the highway fund. Here are recent rates of transfer and dates they became effective: 1

July 1, 2010: 11.427%
July 1, 2011: 11.26%
July 1, 2012: 11.233%
July 1, 2013: 17.073%
July 1, 2015: 16.226%
July 1, 2016 and thereafter: 16.154%

A nearby chart shows the dollar amounts transferred to the highway fund from sales tax revenue. In 2006 the transfer was $98.914 million, and by 2016 it had grown to $514.519 million.

KDOT spending, major road programs. Click for larger.


Notes

  1. Kansas Statutes Annotated 79-3620.