Voice For Liberty

Tag: TIF districts

  • In Wichita, is Economic Development Proven Public Policy?

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

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

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

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

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

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

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

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

  • Wichita and the Old Town Warren Theater Loan

    Remarks to be delivered to the Wichita City Council, July 1, 2008.

    Mr. Mayor and members of the Council, we are potentially beginning a journey down a road where there are two classes of businesses in Wichita.

    There are business owners who seek to earn their profit through market entrepreneurship, that is, by meeting the demands of their customers and the marketplace. That’s a difficult thing to do. An entrepreneur must sense customer demand and desires, and then commit resources to satisfying customers. If entrepreneurs are correct in their judgments and successful in their execution, they earn profits.

    There are other business owners who, through TIF districts, tax abatements, and outright subsidy as in the case of the proposed loan agreement before you today, earn their profits by pleasing politicians such as the members of this council. They practice political entrepreneurship. The people they must please are a majority of this council. Investments — to the extent that government spending can be called that — will be made based on political, rather than marketplace, considerations.

    We have a proud history of market entrepreneurs in Wichita; men whose names are known not only in Wichita, but across the world. There are many other men and women in Wichita who, although their names are not famous, successfully meet customers’ demands in the marketplace and have built successful businesses.

    Mr. Warren is, by all accounts, a talented entrepreneur who earns profits by pleasing customers at his theaters located on Wichita’s west and east sides and in other cities.

    The fact that this theater — operated by a person with great experience in running successful theaters — is not profitable tells us all we need to know about the wisdom of investment in this business. If Mr. Warren and his partners wish to run it as a hobby, let them do so with their own money. The citizens of Wichita, however, need to be able to make their own investments in ways that they believe will earn a profit — that profitability being the one sure test of the success of an investment. When government makes “investments” based on political calculation, the people of Wichita are less able to make their own private investments.

    The council made an unwise decision some years ago when it established the TIF district for this theater. While the city is bound to pay to retire the bonds that were issued, that is the only obligation we have. The fact that a bad decision was made in the past should have no bearing on the decision to be made today. This is especially true as a decision to make this loan steers Wichita firmly towards the path of less private entrepreneurship and more government control of investment in Wichita.

  • Warren Old Town Wichita Theater: Good Money After Bad?

    This letter is from my friend Darrell Leffew. Not everyone seems to understand the folly of throwing good money after bad. “Taxpayers are already on the hook” is Wichita city council member Jeff Longwell’s opinion as expressed in a Wichita Eagle article. Mr. Longwell, I realize you weren’t a member of the council when we taxpayers were placed on the hook, but don’t help us on another, please.

    Let us not throw more good money after bad. The Wichita City Council has approved a business loan to the Limited Liability Company that owns the Old Town Warren Theater.

    That same company was quoted in an Eagle article earlier this month as saying the remodel paid for by the loan would cut the losses. No mention of ending the losses, just reducing. What are the exact estimates? Taxpayers should be fully informed.

    An Eagle article of November 2004 talked about revenues related to the TIF, which funded Old Town development, being woefully short. How many millions of taxpayer dollars are already at risk? And if the business goes into foreclosure before the loan is repaid, we the taxpayers have first claim on a failed, debt ridden property.  Our interim City Manager advised against the loan.

    Our elected officials are not just offering commercial banking now but BAD commercial banking. And the “Open for Business” sign is bright neon.

    Has our City Council overstepped its authority? Voters will decide at the polls.

  • Wichita city manager’s warning is too late

    On Tuesday June 16, 2008, the Wichita City Council agreed to lend the Old Town Warren Theatre’s owners $6 million so they could keep the theater open. (City agrees to loan Warren $6 million June 18, Wichita Eagle).

    Wichita Interim City Manager Ed Flentje issued this warning to the council: “There are in this community much larger businesses with much larger employment who may see this opening as something that will open a door for those businesses to come and say, ‘You’ve done it before, you can do it for us.’”

    Dr. Flentje, I hate to break the news to you, but the door is already wide open. Not so much for loans directly from the city to business entities, but for all sorts of TIF districts and tax abatements. These arrangements generally let developers use the property taxes they pay — taxes that would normally go to fund the operations of the city and other governments — to pay for the development itself. Developers who don’t receive tax favors have to pay property taxes, and also must pay for the types of things that TIF districts funds pay for.

    These special tax favors are now dispensed freely by the Wichita City Council. As I stated at a public hearing before that body not long ago: “It is now apparent that TIF districts and tax abatements are entitlements that developers in politically-favored areas of town can count on receiving, while everyone else pays.” See Tax Abatements in Wichita.

    Whether a developer receives a low-interest loan, or an outright gift, or the privilege of having your property taxes returned right back to you, these special favors serve to distort the free allocation of capital according to what people really want. Instead, capital, in the form of tax dollars, is allocated according to the desires of politicians.

    Bill Warren and the theater’s other owners know very well the benefits that TIF districts can bring to a development. The theater in question benefited from a TIF district established in 1999. That district is, according to the article, the only tax district in Wichita that doesn’t generate enough tax revenue to pay for the bonds issued for it.

    The problems with this TIF district benefiting the Warren Theater are not new. The Wichita Eagle reported on November 14, 2004 (“Old Town tax district misses goals: Plaza falls short”) that “A special tax district set up to pay for millions of dollars of public spending in the Old Town Cinema Plaza is generating less than half the revenue it’s supposed to — and taxpayers citywide will have to pick up the tab.”

    Also see Warren bailout poses dilemma.

  • Tax Abatements in Wichita

    Remarks to Wichita City Council, June 3, 2008.

    A few months ago I spoke before this council asking that you not grant a tax abatement. At that time I was told that granting a property tax abatement doesn’t have any impact on City of Wichita spending.

    I found this quite remarkable, that new homes and buildings can be built but not consume any additional resources that the city and other local governments supply. If this is truly the case, why should a new development of any type at any location have to pay any property tax at all?

    There is a cost to the city and other local governments in granting tax abatements. Actually, the cost is born by the taxpayers who don’t achieve the favored status that these developers are seeking. These non-favored taxpayers — homeowners and businesses alike — have to pay for the services this development will consume but will not pay for because they seek to avoid paying their property tax.

    Mr. Mayor and Members of the Council, if there were no impact on city spending, no cost to the taxpayers of the City of Wichita when a TIF district is created or tax abatements given, why would we not grant these benefits to anyone building anything in any part of town?

    It is now apparent that TIF districts and tax abatements are entitlements that developers in politically-favored areas of town can count on receiving, while everyone else pays.

    The granting of these benefits to developers working in certain parts of Wichita amounts to central government planning. It is government, instead of people trading freely in markets, deciding to direct capital from one part of town to another for political, instead of economic, reasons. In effect, this council says to entrepreneurs who chose to invest their capital somewhere else in Wichita — somewhere that doesn’t qualify for tax abatements — that they made a mistake. And they will pay for that mistake, as they pay the property tax that these developers will escape paying.

    It may be that this project is not economically viable unless it receives the tax abatement. If so, we should ask why our taxes are so high that they discourage investment and economic activity.

  • Remarks to Wichita City Council, April 1, 2008

    Following are remarks I delivered to the Wichita City Council, asking them to not approve tax increment financing (TIF) for a project in Wichita. The council approved the financing by a vote of six to one. Thank you to council member Paul Gray for his dissenting vote.

    Mr. Mayor and members of the Wichita City Council, I ask you to not approve this TIF financing request, and to cease this practice in the future.

    We need to allow markets to channel capital and investment to where people value it greatest. The profit and loss system provides that guidance.

    By asking for the TIF financing, developers are sending us a signal that without the special tax favor, their project would not be economically feasible. They evidently have judged that it would not be profitable. They must feel that they will not be able to sell or rent at prices that will cover their costs of developing this project.

    This means that proceeding with the project is investing capital somewhere other than its most-valued use. We know that because developers build other things in Wichita without receiving a subsidy, and they are able to earn a profit.

    Now this project may satisfy the political goals of some people who believe that not enough development is happening in their politically-desired part of town. But these people are not spending their own money to accomplish this goal.

    If these developers want to build something in this area, they need to figure out what will appeal to people, what will fill enough of a need, that the project is profitable on its own. That’s how we will know that this investment is wise. They won’t have to appear before governmental bodies seeking approval for their plans. They can just do it.

    That’s market entrepreneurship. It is the way that wealth is created. These developers, instead, are practicing political entrepreneurship, where they seek to please various governmental bodies, rather than satisfying consumers who express their desires through the mechanism of markets.

    This leads to a corrosive environment where nearly every week someone appears before this council requesting special treatment, that favor paid for by the rest of the the community. This is harmful.

    Supporters of TIF explain them in a way that makes it seem as though there is no cost involved in granting the subsidy. But there is. Why would these developers want them, and why would this council not grant them to everyone if there were no cost?

    I propose a pledge that this council could take that will help our community become aware of the cost of these subsidies, and will also alleviate some of the inequity. When the City of Wichita grants special tax treatment, it must reduce its spending by the same amount. By following this simple rule, the City can be reminded of the cost of granting special tax favors, and the rest of us won’t have to pay for them.

  • Tax increment financing in Wichita benefits few

    Today the Wichita City Council votes on granting $4.5 million in tax increment financing to a developer. Here’s an article from August 17, 2006 that explains why the council should not approve this gift.

    (Note to The Wichita Eagle: Why not report stories like this a little earlier than the day the council is voting?)

    Recently the City of Wichita formed a TIF (tax increment financing) district to aid a developer who wishes to build in the College Hill neighborhood.

    How does a TIF district work? The Wichita Eagle reported: “A TIF district doesn’t cost local governments any existing tax money. It takes property taxes paid on new construction that would ordinarily go into government coffers and redirects it to the bond holders who are financing the project.”

    In the present case, the value of the benefit the developer sought is estimated to be worth $3.5 million to $4 million. Whether this benefit is given at no cost to existing government, as The Wichita Eagle article implies, is open to debate. If the new development does not use any local government services, then perhaps there is no cost in giving the benefit. But if that’s true, we might ask this question: if the development does not consume any government services, why should it have to pay taxes at all?

    There is evidence that TIF districts are great for the developers — after all, who wants to pay taxes — but not so good for the rest of the city and county. The article Tax Increment Financing: A Tool for Local Economic Development by economists Richard F. Dye and David F. Merriman states, in its conclusion:

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

    So TIFs are good for the favored development — not a surprising finding. What about the rest of the city? Continuing from the same study:

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

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

    There’s also evidence that TIF districts are simply a transfer of wealth from the taxpayers at large to a privileged few. In the paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” by Iowa State University economists David Swenson and Liesl Eathington, we can read this:

    There is indirect statistical evidence that this profligate practice [establishing TIF districts] is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.

    This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. … there is virtually no evidence of broad economic or social benefits in light of the costs.

    In the present case in Wichita, the developer says that without the benefit the TIF provides, the project is not economically viable. This is the standard rationale given for the requirement of the TIF district. Without the TIF, the development would not take place.

    It may be true that this project in College Hill is not economically viable. If so, we have to wonder about the wisdom of investing in this project. More importantly, we should ask why our taxes are so high that they discourage investment and economic activity.

    It may also be that the developer simply wishes to gain an advantage over the competition by lobbying for a favor from government. As government becomes more intrusive, this type of rent-seeking behavior is replacing productive economic activity.

    There is one truth, however, if which I am certain: when businesses and individuals pay less tax, they have the opportunity to invest more. TIFs and tax abatements are tacit recognition that the cost of government is onerous and serves to decrease private economic activity and investment.

    Here’s a better idea: reduce taxes for everyone, instead of only for companies and individuals that are successful in extracting favors from our local governments.

  • Tax increment financing in Wichita benefits few

    Recently the City of Wichita formed a TIF (tax increment financing) district to aid a developer who wishes to build in the College Hill neighborhood.

    How does a TIF district work? The Wichita Eagle reported: “A TIF district doesn’t cost local governments any existing tax money. It takes property taxes paid on new construction that would ordinarily go into government coffers and redirects it to the bond holders who are financing the project.”

    In the present case, the value of the benefit the developer sought is estimated to be worth $3.5 million to $4 million. Whether this benefit is given at no cost to existing government, as The Wichita Eagle article implies, is open to debate. If the new development does not use any local government services, then perhaps there is no cost in giving the benefit. But if that’s true, we might ask this question: if the development does not consume any government services, why should it have to pay taxes at all?

    There is evidence that TIF districts are great for the developers — after all, who wants to pay taxes — but not so good for the rest of the city and county. The article “Tax Increment Financing: A Tool for Local Economic Development” by economists Richard F. Dye and David F. Merriman states, in its conclusion:

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

    So TIFs are good for the favored development — not a surprising finding. What about the rest of the city? Continuing from the same study:

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

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

    There’s also evidence that TIF districts are simply a transfer of wealth from the taxpayers at large to a privileged few. In the paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” by Iowa State University economists David Swenson and Liesl Eathington, we can read this:

    There is indirect statistical evidence that this profligate practice [establishing TIF districts] is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.

    This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. … there is virtually no evidence of broad economic or social benefits in light of the costs.

    In the present case in Wichita, the developer says that without the benefit the TIF provides, the project is not economically viable. This is the standard rationale given for the requirement of the TIF district. Without the TIF, the development would not take place.

    It may be true that this project in College Hill is not economically viable. If so, we have to wonder about the wisdom of investing in this project. More importantly, we should ask why our taxes are so high that they discourage investment and economic activity.

    It may also be that the developer simply wishes to gain an advantage over the competition by lobbying for a favor from government. As government becomes more intrusive, this type of rent-seeking behavior is replacing productive economic activity.

    There is one truth, however, if which I am certain: when businesses and individuals pay less tax, they have the opportunity to invest more. TIFs and tax abatements are tacit recognition that the cost of government is onerous and serves to decrease private economic activity and investment.

    Here’s a better idea: reduce taxes for everyone, instead of only for companies and individuals that are successful in extracting favors from our local governments.

  • Sedgwick County surrenders key tax advantage

    Sedgwick County Surrenders Key Tax Advantage
    By Karl Peterjohn, Executive Director, Kansas Taxpayers Network

    Spirit Aerosystems CEO Jeff Turner defended the massive spending hike that was used as the primary justification for the county’s 8.8 percent property tax hike in his editorial August 9, 2006. Turner’s support for this increased government spending ignored some important ramifications behind this economically destructive vote.

    Sedgwick County has an important fiscal advantage over 19 other Kansas counties. Sedgwick County has no community college and hence no community college property tax. That property tax is a major reason why this levy makes the total tax burden higher in Butler, Cowley, and Reno counties. The Wichita Area Technical College is becoming this community’s community college. This will mean increasing pressure to raise property taxes. This would be in addition to the current 1.5 mills left over from the old Wichita University days that the county charges.

    Sadly, the Sedgwick County commission seems intent on creating another tax dependent entity here in this community. If Jeff Turner, Spirit Aerosystems and Turner’s former company Boeing want to promote property tax hikes, that is certainly their prerogative.

    It is a public record that Boeing tied as the largest donor for the 2000 Wichita school bond issue with a five figure donation and Raytheon was the largest corporate donor in support of the Local Option Budget property tax hike for Wichita during that 1997 property tax referendum. Cessna’s CEO Jack Pelton spoke out in support of the county’s spending plans that required this property tax hike August 9.

    On the other hand, when the news cameras are generally gone, these aircraft companies return to the city or the county and seek sizable, often 100 percent property tax abatements. So a small or medium sized business gets to pay a much higher proportion of say $100,000 worth of their commercial property than the largest public businesses in this community. This is not fair.

    This distorts the overhead costs shifting the fiscal burden from the taxpayer subsidized onto the businesses without the tax breaks. It also shifts this burden onto homeowners and other taxpayers. Special tax breaks provides the subsidized firms with lower overhead costs so they can afford pay more for employees too. That places small and medium sized firms that lack the political clout and leverage, at a hiring disadvantage as well. If the non tax abated firms have out-of-state competitors their extra overhead costs hurts their ability to compete. However, tax abatements are a big help in cyclical industries that are in perpetual “hiring and firing” cycles and need to pay more because of this employment instability.

    There is certainly a need for qualified workers for many Wichita area businesses. This $40 million county spending hike, that is well above per foot construction costs, ignores a bigger question. How much spending in the government school establishment is enough? Property tax hike advocates are ignoring the fact that well over $3/4 billion in taxes are going to be spent on the 10 public school districts in this county in 2006-07. This figure is growing rapidly in the age of judicial edicts and Montoy.

    2004 Census data indicates that Kansas has the 14th highest property taxes in all 50 states as well as the highest property taxes per capita in our five state region. Soaring appraisals have been the primary cause of this situation but the county’s rising mill levy without getting voter approval is an insult to every county voter. In 1997 almost 90 percent of county voters wanted to retain the property tax lid on local government. County officials helped kill the property tax lid in 1999 and now will not let voters decide this property tax hike at the ballot box. Creating a new level of local government in Sedgwick County with higher property taxes will hurt and hinder overall economic growth here.