Tag Archives: Visioneering

When should Wichita compare itself to peers?

In a Wichita Eagle article about the Intrust Bank Arena in downtown Wichita, we see Wichita public relations consultant Vera Bothner complain that Wichita is being unfairly compared to other cities in our region, in particular Oklahoma City, Tulsa, and Kansas City. Wichita is smaller than these cities, she says, and we should not hold Wichita to a standard that it can’t meet.

But in public life, we find Wichita frequently compared to these cities. These three cities are part of the four metropolitan areas that Visioneering Wichita choose as peers. (The other is Omaha.)

Intrust Bank Arena commemorative monument
Intrust Bank Arena commemorative monument
During the recent sales tax campaign, pro-tax advocates often mentioned Oklahoma City and Tulsa as cities that Wichita should emulate.

So it may be confusing for Wichita voters to determine when a comparison of Wichita to Oklahoma City and Tulsa is valid, and when it is not.

There is a trend, however. For the Wichita business establishment, represented by the Wichita Metro Chamber of Commerce (Bothner is a member of its executive committee), the trend is for more taxes and more government spending. Whenever a comparison can be made that results in the conclusion that there’s not enough taxation and government spending in Wichita, it’s likely the Wichita Metro Chamber of Commerce will do that.

(By the way, if people are worried about running government like a business, a good place to start this discipline would be Intrust Bank Arena, with treating its finances like an actual business. Proper attention given to the depreciation expense of Intrust Bank Arena in downtown Wichita would recognize and account for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. But that doesn’t happen. See Intrust Bank Arena: Not accounted for like a business.)

Here’s an excerpt from After 5 years, Intrust Bank Arena still battles image problem.

Comparing Intrust Bank Arena to Tulsa’s BOK center is a mistake, although a common one, said Vera Bothner, whom SMG hired as a local consultant. Comparing it to Kansas City’s Sprint Center or Oklahoma City’s Chesapeake Energy Arena are even bigger mistakes. But many fans do that, she found.

Tulsa’s population base, for one, is Wichita’s and a half. Wichita has about 637,000 people in its metro area. Tulsa has 960,000. Tulsa’s arena is bigger, too, with 4,000 more seats.

Oklahoma City and Kansas City are even further out of Wichita’s league. Kansas City’s population is 2.05 million, and its Sprint Center seats 19,500. Oklahoma City has 1.32 million people, and its arena holds 18,200.

In reality, Bothner said, Wichita is more comparable to Little Rock, Ark., which has a population of 725,000 and an 18,000-seat arena; Des Moines, with 600,000 people and a 17,000-seat arena; and Bossier City, La., and its 14,000-seat CenturyLink Center.

“The economics of this particular marketplace have just been hard for people to understand, I think, because geographically we compare ourselves to these other cities, and we do that a lot,” Bothner said. “But just because arenas are in our geographic region does not mean that the demographics and the size of the city are similar enough to make a good comparison.”

To Wichita, a promise to wisely invest if sales tax passes

Claims of a reformed economic development process if Wichita voters approve a sales tax must be evaluated in light of past practice and the sameness of the people in charge. If these leaders are truly interested in reforming Wichita’s economic development machinery and processes, they could have started years ago using the generous incentives we already have.

At a conference produced by Kansas Policy Institute on Friday September 19, a panel presented the “nuts and bolts” of the jobs portion of the proposed Wichita sales tax that voters will see on their November ballots. I asked a question:

Listening to at least two of the three speakers, it sounds like Wichita’s not been using incentives. Two-and-a-half years ago when Boeing announced it was leaving Wichita, Mayor Brewer angrily produced a document saying since 1980, we’ve given Boeing $658 million in tax forgiveness. Last year the city and the state were somehow able to come up with $84,000 per job for 400 jobs here at NetApp. So we’ve been using a lot of incentives, haven’t we? What are we going to do different now, that hasn’t worked for us, clearly, in the past.

One of the panelists, Paul Allen, provided this answer:

I’m not sure that I agree that it hasn’t worked for us in the past. In fact, Boeing is still one of the largest taxpayers in the city. It has $6 million of real estate taxes paying a year. The Boeing facilities are still paying taxes in this community. Again, the jobs aren’t here, but Boeing on its rebates paid those back, those are on incremental property that it invested that came back on the tax rolls over time, and I think 6 million is the correct number last I looked there is still on the tax rolls in this city. So you have got pay back. And NetApp? NetApp is a win for the city. If you look at the economic models measuring the results of those 400 jobs and the fact that now the NetApp relationship likely to happen on the campus of Wichita State, that’s economic growth. Those are the kinds of jobs you need to attract. What are we going to do differently? We’re going to look at infrastructure more, we’re looking at a more integrated program across the spectrum. WSU is certainly a big part of that program, we’re going to get serious about diversification. We only talk about diversification in the city when the economy is down. We need to be a long-term program for diversification, taking the skills we have and looking at those skills and attracting companies here, helping our companies to expand. We need to invest in our work force, whether it’s at college level or particular to the technical colleges. Again those are the kinds of investments that are going to create a workforce that becomes attractive. It’s just one component, I think if we said it’s one tool in the toolbox. That’s a very important tool. And we are up against communities like Oklahoma City that has $75 million sitting in a fund and believe me that’s a lot more than we’ve invested in the last 10 years. And we will continue to get beaten in the competition if we don’t get more serious about being able to fight for the jobs and you can ask most business owners, particularly manufacturing, they’re called constantly from other communities trying to recruit then out of this community. And that competition is only going to get more intense, in my opinion. So we’ve got to be prepared to wisely invest our money.

(Paul Allen was Chair of Greater Wichita Economic Development Coalition for 2011, and Chair of Wichita Area Chamber of Commerce in 1998. The Wichita Chamber selected him to present the case for the sales tax at this conference.)

Allen’s pushback at the idea that the Boeing incentives were a failure produced a few gasps of astonishment from the audience. I’m sure that if any of Wichita’s elected officials had been in attendance, they would also have been surprised.

Response to Boeing AnnouncementIn January 2012, when Boeing announced it was leaving Wichita, people were not happy. Mayor Carl Brewer in a written statement said “The City of Wichita, Sedgwick County and the State of Kansas have invested far too many taxpayer dollars in the past development of the Boeing Company to take this announcement lightly.” Kansas Representative Jim Ward, who at the time was Chair of the South Central Kansas Legislative Delegation, issued this statement regarding Boeing and incentives: “Boeing is the poster child for corporate tax incentives. This company has benefited from property tax incentives, sales tax exemptions, infrastructure investments and other tax breaks at every level of government. These incentives were provided in an effort to retain and create thousands of Kansas jobs. We will be less trusting in the future of corporate promises.” (See Fact-checking Yes Wichita: Boeing incentives)

But now an icon of Wichita’s business community says that since Boeing is paying $6 million per year in property taxes, it really was a good investment, after all. Today, however, no one is working in these buildings. No productive economic activity is taking place. But, government is collecting property taxes. This counts as an economic development success story, according to the people who support the proposed Wichita sales tax.

Wichita Chamber of Commerce 2013-07-09 004Another important thing to learn from this conference, which is hinted at in Allen’s answer, is that sales tax supporters are not recognizing all the incentives that we have in Wichita. One speaker said “It would be a travesty for you to do nothing.” (He was from out of town, but the Wichita Metro Chamber of Commerce selected him to speak and presented him as an expert.) But as we know from the premise of my question, we have many available incentives, and in large amounts, too.

Another problem is Allen’s disagreement that what we’ve done has not been working. This is contrary to the evidence the Wichita Chamber has been presenting, which is that we have lost thousands of jobs and are not growing as quickly as peer cities. That is the basis of their case for spending more on economic development.

Allen also spoke of a $75 million fund in Oklahoma City, saying it is much larger that what we’ve invested. I’m sure that Allen is not including all the incentives we’ve used. There were some years, for example, when the value of the abated taxes for Boeing was over $40 million. Last year the city initiated a process whereby NetApp saved $6,880,000 in sales tax, according to Kansas Department of Commerce documents. These tax abatements are more valuable than receiving the equivalent amount as a cash payment, as the company does not pay income taxes on the value of abated taxes.

"Yes Wichita" website
“Yes Wichita” website
Wichita voters will also want to consider the list of things Allen said we will do differently in the future. He spoke of concepts like infrastructure, an integrated program, diversification, investing in our work force, attracting companies, and helping existing companies expand. He told the audience “So we’ve got to be prepared to wisely invest our money.” There are two things to consider regarding this. First, these are the things we’ve been talking about doing for decades. Some of them we have been doing.

Second, the people saying these things — promising a new era of economic development in Wichita — are the same people who have been in charge for decades. They’ve been chairs of the Wichita Metro Chamber of Commerce, Greater Wichita Economic Development Coalition, Visioneering Wichita, Wichita Downtown Development Corporation, and Go Wichita Convention and Visitors Bureau. They’re the members of the leadership committee the Chamber formed.

These people are Wichita’s business establishment. They’ve been in charge during the time the Wichita economy has fallen behind. Now, they promise reform. We will do things differently and better, they say. Now, we will prepare to invest wisely, Allen told the audience.

If these leaders are truly interested in reforming Wichita’s economic development machinery and processes, they could have started years ago using the generous incentives we already have.

‘Transforming Wichita’ a reminder of the value of government promises

When Wichita voters weigh the plausibility of the city’s plans for spending proposed new sales tax revenue, they should remember this is not the first time the city has promised results and accountability.

Do you remember Transforming Wichita? According to the city, “Transforming Wichita is the journey by which we are fundamentally changing the way we measure, report and perform the work of delivering services to the citizens of Wichita.”

In more detail, the city website proclaimed: “TW is the journey by which we will be fundamentally changing the way we deliver services to the citizens of Wichita. Our vision is for Wichita to be a premiere Midwestern city where people want to visit, live and play and for the city government to be a model of world class city governance where citizens receive the best possible value for their tax dollars and have confidence in their city government.”

At the end of this article I present the complete page from the city’s website as captured on November 10, 2007. That’s just seven years ago. There are officeholders (Wichita Mayor Carl Brewer, City Council member Jeff Longwell, City Council member Lavonta Williams) and many bureaucrats still in office from that year. It’s not ancient history.

Some of the most frequently-mentioned concepts in this document are:

  • performance
  • accountability
  • trust
  • confidence
  • measure and report

Wichita spending data.
Wichita spending data.
The document mentions “supported by modernized information systems that facilitate collaboration with our partners.” That promise was made seven years ago. Today, do you know what you get when you ask the City of Wichita for spending records? The city can supply data of only limited utility. When I asked for spending records, what was supplied to me was data in pdf form, and as images, not text. It would be difficult — beyond the capability of most citizens — to translate the data to useful format. Even if someone translated the reports to computer-readable format, I don’t think the data would be very useful. This is a serious defect in the city’s transparency efforts.

How does Wichita compare to other jurisdictions in this regard? Many governmental agencies post their checkbooks on their websites, having mastered this aspect of accountability and trust years ago. Not so the City of Wichita.

Speaking of websites: The new and “improved” wichita.gov website is actually less useful than the city’s website in 2007. For more on this see A transparency agenda for Wichita.

Regarding performance: One of the most important functions city leaders say they perform is economic development, specifically the creation of jobs. Last year when the Wichita Eagle asked for job creation figures, it reported this:

“It will take us some time to pull together all the agenda reports on the five-year reviews going back to 2003. That same research will also reveal any abatements that were ‘retooled’ as a result of the five-year reviews,” city urban development director Allen Bell said.

One might have thought that the city was keeping records on the number of jobs created on at least an annual basis for management purposes, and would have these figures ready for immediate review. If the city had these figures available, it would be evidence of trustworthiness, performance, accountability, and measuring and reporting. But the city isn’t doing this.

Regarding values for dollars spent: During the past decade Wichita spent $247 million on the Aquifer Storage and Recovery Program, or ASR. As that project was contemplated, Wichita was told there was sufficient water for the next 50 years. We should ask: What value did we receive for those dollars?

Speaking of accountability: Much of the money used to pay for the ASR project was borrowed in the form of long-term debt. Now we are told that long-term borrowing to pay for a new water supply would be bad fiscal management. So was it was prudent and advisable to borrow over $200 million for water projects during the last decade? Who do we hold accountable for that decision, if what city leaders now say is correct?

Here’s a page from the city’s website as captured on November 10, 2007:

Transforming Wichita

Transforming Wichita is the journey by which we are fundamentally changing the way we measure, report and perform the work of delivering services to the citizens of Wichita. Our Vision:

  • For Wichita to be a premiere Midwestern city where people want to visit, live and play (as envisioned in Visioneering Wichita).
  • For Wichita City government to be a model of world class city governance — where citizens are getting the best possible value for their dollars and the City has the public’s confidence and trust. For this vision to be attained, we have to adapt to change!

twWhile we are doing a lot of things right, we can’t be complacent, resting on our laurels from past successes. The paradox is that we must retain faith that the future is bright, while being willing to face challenges of our current situation. We must be willing to challenge every aspect of how we’re doing things today. We must position ourselves for the future.

We will do this by transforming City government into a high performance organization that:

  • Focuses on results
  • Understands what results matter most to their customers
  • Makes performance matter
  • Moves decision-making down and out to the front-line, closest to customers; and
  • Fosters an environment of excellence, inclusiveness, accountability, learning and innovation.

Through Transformation Wichita:

  • We deliver outstanding results that matter to our customers and are trustworthy stewards of the funds with which citizens have entrusted us;
  • We utilize team work and the best business processes, supported by modernized information systems that facilitate collaboration with our partners;
  • We measure and report on our work, using a balanced scorecard that shows progress and results in how we carry out programs and activities, so that performance matters; and
  • We engage in work that produces results that matter for our customers; we will work with colleagues in an environment where learning enriches us and innovation expands our potential.

More about TW

TW is the journey by which we will be fundamentally changing the way we deliver services to the citizens of Wichita. Our vision is for Wichita to be a premiere Midwestern city where people want to visit, live and play and for the city government to be a model of world class city governance where citizens receive the best possible value for their tax dollars and have confidence in their city government.

While the City is doing a lot of things right, we can’t be complacent. We must be willing to challenge every aspect of how we’re doing things today and position ourselves for the future.

We will accomplish this by transforming City government into a high performance organization that:

  • Delivers outstanding results that matter to our customers and is a trustworthy steward of the funds with which citizens have entrusted us;
  • We utilize team work and the best business processes, supported by modernized information systems that facilitate collaboration with our partners;
  • We measure and report on our work, using processes that show progress and results in how we carry out programs and activities; and
  • We engage in work that produces results that matter for our customers.

Former Wichita mayor: Where is the water?

Former Wichita mayor Bob Knight explains that when he left office in 2003, we were assured we had water for 50 years. What has happened?

Knight also reminded the audience that there is a Sedgwick County sales tax, part of which is divided among cities like Wichita. He also took the Visioneering planning process to task. In the past ten years, he wondered why no one asked about a city without water.

From a forum at Wichita Pachyderm Club on July 22, 2014. View below, or click here to view at YouTube.

Wichita performs well in local government job creation

The Wichita metropolitan area compares well creating jobs in local government, but trails in private sector jobs.

Data from the Bureau of Labor Statistics through 2013 allows us to compare the Wichita metropolitan area with the peers selected by Visioneering Wichita. I’ve gathered BLS data divided by industry sector.

Growth in Local Government Jobs, Wichita and Visioneering Peers. Wichita is the dark line.
Growth in Local Government Jobs, Wichita and Visioneering Peers. Wichita is the dark line.
When considering only government jobs, especially local government jobs, Wichita ranks high. When looking at private sector jobs, however, Wichita is in last place, and by a wide margin.

This is a problem. It is the private sector that generates the taxes that pay for government. When government grows faster than the private sector, economic activity is shifted away from productive activities to unproductive. The economist Dan Mitchell has proposed what he calls the “Golden Rule of Fiscal Policy,” which is: “The Private Sector should Grow Faster than Government.”

In Wichita, we see our local government proposing to grow itself even more by recommending that voters approve increased sales taxes to pay for more government programs. Officials tell us the increased spending is needed so that government can correct problems with Wichita’s economy, water supply, transit, and streets.

Growth in Private Sector Jobs, Wichita and Visioneering Peers. Wichita is the dark line.
Growth in Private Sector Jobs, Wichita and Visioneering Peers. Wichita is the dark line.
On these and other issues, the Wichita Eagle recently quoted Mayor Carl Brewer: “We’ve put them off for too long. We didn’t want the challenges. We didn’t want the tax bills. But now, to maintain our quality of life, we’ve got to catch up.”

Wichita’s government has created problems, by the mayor’s admission. Now, Wichita politicians and bureaucrats ask that we rely on government to fix the problems.

The interactive visualization I’ve created from BLS data lets you compare Wichita’s job growth with our Visioneering peers. You can select various industry sectors for display.

Data is from the Bureau of Labor Statistics of the U.S. Department of Labor. Visualization created by myself using Tableau Public. Click here to open the visualization in a new window.

A lesson for Wichita in economic development

When a prominent Wichita business executive and civic leader asked for tax relief, his reasoning allows us to more fully understand the city’s economic development efforts and nature of the people city hall trusts to lead these endeavors.

In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This application is of more than usual interest as the company’s CEO,

High Touch, Wichita, Kansas.
High Touch, Wichita, Kansas.
Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce. The Chamber, along with its subsidiary Greater Wichita Economic Development Coalition, are the main agencies in charge of economic development for the Wichita area. Under Chambers’ leadership, these organizations are recommending that the city council authorize a vote on raising the Wichita sales tax for the purposes of economic development.

Let’s take a look at some of the aspects of this company’s application and the city’s agenda packet material (available here).

In its application letter, High Touch argues as follows (emphasis added):

To demonstrate our commitment to Wichita, as well as accommodate our expected growth plans, High Touch Technologies would like to purchase a 106,000 sq. ft. building in Downtown Wichita.

At this time, High Touch Technologies is requesting your support for the issuance of approximately $2,000,000 City of Wichita, Kansas, Taxable Industrial Revenue Bonds. High Touch greatly appreciates any support we can receive on the purchase of this office building through the City’s participation of Industrial Revenue Bonds and the property tax savings associated with this financing method. We intend to continue our growth and expansion over the next several years and these benefits would be helpful in offsetting the substantial capital requirements associated with this project.

High Touch Technologies believes in Wichita and support the community and its economy through corporate stewardship programs. We look forward to working with you and Members of the Council on this project and are always available to answer questions regarding this project or any of our business activities.

Later in the letter:

The applicant agrees to enter into an agreement for Payment in Lieu of Taxes (PILOT) equal to the ad valorem property tax payment amount for the 2013 tax year. The applicant respectfully requests that the payments be capped at that rate for a period of ten (10) years. The tax abatement will permit the applicant to proceed with the anticipated project, allow for its anticipated growth, and result in the public benefits otherwise outlined herein.

The issuance of Industrial Revenue Bonds will be used to lower the cost of office space in the acquired building. The lower costs will give High Touch, Inc. incentive to grow its presence in the corporate office in Wichita. New employees will be added to this Wichita office instead of other offices across the U.S. The savings in office space will allow High Touch, Inc. to use those savings for expansion.

Some remarks:

To demonstrate our commitment to Wichita: This is ironic because High Touch is asking to be excused from paying the same property taxes that most other people and business firms have to pay. Instead of commitment, this demonstrates hostility to the taxpayers of Wichita, who will have to pay more so that this company can pay less.

chutzpa definition 2But that irony is surpassed by the spectacle — chutzpa — of the incoming chair of a city’s chamber of commerce threatening to move his company out of the city unless the company receives incentives.

helpful in offsetting the substantial capital requirements: Well. Who wouldn’t appreciate help in offsetting the cost of anything? We should categorize this as unpersuasive.

corporate stewardship programs: Underlying this argument is that because High Touch makes charitable contributions, it should be excused from the same tax burden that most of us face. Here’s a better argument: Be a good corporate citizen by paying your fair share of taxes. Don’t ask for others to pay your share of taxes. That will let citizens make their own charitable contributions, instead of subsidizing what Wayne Chambers want to do.

Cronyism in Wichita - High Touchanswer questions regarding this project or any of our business activities: This refers to how the members of the city council will make a judgment that this business is worthy of subsidy, and that others are not. The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has demonstrated that it is through markets and their coordination of dispersed knowledge that we best learn where to direct capital investment. It is simply impossible for this city government to effectively decide in which companies Wichitans should invest their tax dollars. Nonetheless the city council made the decision, and it wants a larger role.

Payment in Lieu of Taxes (PILOT): High Touch is not proposing to totally escape its tax burden. Only partially so, through the PILOT. But the proposed payment is quite generous to the company. A few quick (and probably imprecise) calculations shows how small the PILOT is compared to what taxes would be. City documents indicate the proceeds of the IRBs will be used to pay for $2,000,000 of improvements. This amount of commercial property times 25% assessment ratio times 120.602 mill levy rate equals $60,301 in taxes. High Touch, through the PILOT, is proposing to pay $33,250, just a little more than half of what the taxes might be.

But the true value of the taxes being avoided is probably much higher. As an example, nearby office space is listed for sale at $28 per square foot, and that’s a distress-level price. Applying that price to this building, its value would be almost $3 million. If we look at market capitalization rates, which are generally given as from nine to eleven percent for class A space, we arrive at a much higher value: If we say $10 per square foot rental rate times 106,000 square feet at nine percent cap rate, the value would be almost $12 million. Taxes on that would be about $300,000 per year.

Wichita Chamber of Commerce 2013-07-09 004These are back-of-the-envelope calculations using assumed values that may not be accurate, but this gives an idea of what’s actually happening in this transaction: High Touch is seeking to avoid paying a lot of taxes, year after year. But by offering to pay a small fraction as PILOT, the company appears magnanimous.

payments be capped at that rate for a period of ten (10) years: High Touch proposed that what it’s paying in lieu of taxes not be subject to increases. Everyone else’s property taxes, of course, are subject to increases due to either assessed value increases or mill rate increases, or both. High Touch requests an exemption from these forces that almost everyone else faces.

lower the cost of office space: Again, who wouldn’t enjoy lower business or personal expenses? The cost of this incentive spreads the cost of government across a smaller tax base than would otherwise be, raising the cost of government for almost everyone else.

added to this Wichita office instead of other offices across the U.S.: The threat of relocation or expansion elsewhere is routinely used to leverage benefits from frightened local governments. These threats can’t be taken at face value. There is no way to know their validity.

use those savings for expansion: Implicit in this argument is that Wichita taxes prevent companies from expanding. True or not, this is a problem: If taxes are too high, we’re missing out on economic growth. If taxes are not too high, but some companies seek exemption from paying them nonetheless, that’s a problem too.

A prosperous company, establishing the template for seeking business welfare

In a December 2011 interview with the Wichita Eagle, the High Touch CEO bragged of how well the company is doing. The newspaper reported “Ask Wayne Chambers how business is, and he’s going to tell you it’s good. Very good. … Chambers said this week that after two years of robust growth, he’s looking for another one in 2012. ‘We have every reason to believe we’ll continue that growth pattern,’ he said.”

In February 2013 the Wichita Business Journal reported “It should be a great year for High Touch Inc. That’s the initial prediction of CEO Wayne Chambers, who says actions the company took during and leading up to 2012 have positioned High Touch to become a true ‘IT solutions provider.'”

If we take Chambers at his word — that his company is successful — why does High Touch need this business welfare? Economic necessity is usually given as the justification of these incentives. Companies argue that the proposed investment is not feasible and uneconomic without taxpayer participation and subsidy. I don’t see this argument being advanced in this case.

Wichita and peer per capita income, Visioneering

Interestingly, at the time of this application Chambers was co-chair of Visioneering Wichita, which advocates for greater government involvement in just about everything, including the management of the local economy. One of the benchmarks of Visioneering is “Exceed the highest of the annual percentage job growth rate of the U.S., Omaha, Tulsa, Kansas City and Oklahoma City.” As shown in this article and this video, Wichita badly lags the nation and our Visioneering peer cities on this benchmark. Visioneering officials didn’t want to present these results to government officials this year, perhaps on the theory that it’s better to ignore problems that to confront them.

Now Wayne Chambers is the chair of the Wichita Metro Chamber of Commerce. Under his leadership, the Chamber of Commerce recommends that Wichitans pay higher sales tax to support the Chambers’ projects.

Will this blatant cronyism be the template for future management of economic development in Wichita? Let’s hope not, as the working people of Wichita can’t tolerate much more of our sub-par economic growth.

In Wichita, ‘free markets’ cited in case for economic development incentives

A prominent Wichita business uses free markets to justify its request for economic development incentives. A gullible city council buys the argument.

At the December 10, 2013 meeting of the Wichita City Council, Bombardier LearJet received an economic development incentive that will let it avoid paying some property taxes on newly-purchased property. The amount involved in that particular incident is relatively small. According to city documents, “the value of the abated taxes on that investment could be as much as $1,980.”

Wichita Economic DevelopmentThis week Bombardier was before the council again asking for property tax abatements. City documents estimate the amount of tax to be forgiven as $1,098,294 annually, for up to ten years. The document prepared for council members did not address sales tax, but generally sales taxes are forgiven when using the program Bombardier qualified for.

The December 10 meeting was useful because a representative of Bombardier appeared before the council. His remarks help us understand how some prominent members of Wichita’s business community have distorted the principles of free markets and capitalism. As illustrated by the fawning of Wichita City Council Member and Vice Mayor Pete Meitzner (district 2, east Wichita) and others, elected officials have long forsaken these principles.

Bombardier’s argument

Don Pufahl, who is Director of Finance at Bombardier Learjet, addressed the council regarding this matter. He started his remarks on a positive note, telling the council “There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.”

Economic development incentives reduce riskWe must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the other side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.

But in the field of economic development as practiced by government, incentive means something given to or granted to a company. That’s what the representative from Bombardier meant by incentive. He explained: “One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.”

A few thoughts: First, Bombardier is not investing in the community. The company is investing in itself. I’m sure Bombardier’s shareholders hope that is true.

Second, the free market system that the speaker praised is a system based on voluntary exchange. That flows from property rights, which is the foundational idea that people own themselves and the product of their labor, and are free to exchange with others. But when government uses incentives, many people do not consent to the exchange. That’s not a free market system.

Milton Friedman: Capitalism and FreedomThird, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In the same article Koch wrote: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.” (Charles G. Koch: Corporate cronyism harms America)

The representative from Bombardier also said that the city’s incentives would reduce Bombardier’s investment risk. There is little doubt this is true. When a company is given money with no strings attached except what the company already intends to do and wants to do, that reduced a company’s risk. What has happened, however, is that risk has not been eliminated or reduced. It has merely been shifted to the people of Wichita, Sedgwick County, the Wichita public school district, and the State of Kansas. When government does this on a piecemeal basis, this is called cronyism. When done universally, we call this socialism.

We can easily argue that actions like this — and especially the large subsidies granted to Bombardier by the state — increase the risk of these investments. Since the subsidies reduce the cost of its investment, Bombardier may be motivated to make risky investments that it might otherwise not make, were it investing its own funds (and that of its shareholders).

Entrepreneurship, EntrepreneurThe cost of Bombardier’s investments, and the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Now the city and Bombardier will say that these investments have a payoff for the taxpayer. That is, if Bombardier grows, it will pay more in taxes, and that constitutes “profit” for taxpayers. Even if we accept that premise — that the city “profits” from collecting taxes — why do we need to invest in Bombardier in order to harvest its “profits” when there are so many companies that pay taxes without requiring subsidy?

Finally, the representative from Bombardier said that these incentives are not a handout. I don’t see how anyone can say that and maintain a straight face.

wichita-chamber-job-growth-2013-12It would be one thing if the Wichita area was thriving economically. But it isn’t. We’re in last place among our self-identified peers, as illustrated in Wichita and Visioneering peers job growth. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation.”

Following is a fuller representation of the Bombardier representative’s remarks to the council.

There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.

One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.

As the company moves forward to invest in the community, those investments are not without risk. … Your incentives allow us to offset some of that risk so that we can move forward with those investments, which hopefully create new jobs and also then also improves the quality of life in our community. … These incentives are not a handout. They are a way that the local government uses such things to offset some of the risk that is involved in local companies as they invest in the community, bring jobs to the community, and improve the community overall.

Wichita per capita income not moving in a good direction

Despite its problematic nature, per capita income in Wichita is used as a benchmark for the economy. It’s not moving in the right direction. As Wichita plans its future, leaders need to recognize and understand its recent history.

One of the benchmarks used by Visioneering Wichita to measure the growth of the Wichita-area economy may not be the best statistic, and its interpretation requires caution.

The measure is per-capita personal income. Specifically, the benchmark goal of Visioneering is “Stop the 21-year decline of Wichita per capita income as a percentage of U.S. per capita income before 2011. By 2024 exceed the annual average of Omaha, Tulsa, Kansas City and Oklahoma City.” (Note that per capita measurements are problematic. See the section at the end of this article.)

Wichita per capita income compared to the nation. Click for larger version.
Wichita per capita income compared to the nation. Click for larger version.
How has the Wichita metropolitan area performed on this benchmark? What are the trends? I’ve plotted per capita income for the United States and the Wichita MSA, along with the ratio of Wichita to the nation. The leaders of Visioneering are right to be concerned about the direction of the Wichita economy relative to the country. Since about 1980, the trend of Wichita as compared to the country is that Wichita is not keeping up, and is falling behind. During the decade of the 1980s, per capita income in Wichita fell below that of the nation. Wichita per capita income had been higher, but since then has mostly been falling farther behind.

Visioneering peers

One of the Visioneering concepts is the idea of peers. The cities Visioneering Wichita selected as Wichita peers are Omaha, Tulsa, Kansas City, and Oklahoma City. It’s useful to compare Wichita with these cities, and also with a few others that are comparable to Wichita and interesting for other reasons.

Wichita per capita income growth compared to peers. Click for larger version.
Wichita per capita income growth compared to peers. Click for larger version.
Nearby are two snapshots from an interactive visualization of per capita income growth. Wichita is the dark line in each of these charts. As you can see, by the last year of available data (2012), Wichita is near the bottom in performance. It wasn’t always that way. In early years, Wichita did well.

Per capita income growth in Wichita and peers, annual rate of growth. Click for larger version.
Per capita income growth in Wichita and peers, annual rate of growth. Click for larger version.
The interactive visualization holds data from the U.S. Bureau of Economic Analysis and was created using Tableau Public. Click here to open it in a new window so that you may form your own conclusions.

We’ve had a plan

The current stance of Wichita civic leaders is that we need a plan to create jobs. But we’ve had plans, with Visioneering being just one.

These leaders also tell us that Wichita can’t compete with other cities in economic development because Wichita’s budget is too small. But as I show here, when Wichita leaders complain about a small budget for incentives, these officials don’t include all incentives that are available and regularly used. Not nearly all.

Per capita measurements

Per capita measures are problematic. They are not meaningless, but interpretation requires caution. Some of the issues with per capita measures are explained by Dave Trabert of Kansas Policy Institute:

Per-capita income is a bad measurement because it rewards cities that are losing people due to domestic migration and punishes those who are gaining.

Even without the per-capita issue, personal income is not a clean measure. Personal income can increase because federal transfer payments grew, employers had to spend more to provide health care benefits, and other items that have nothing to do with measuring relative economic growth.

Better measurements would be private sector jobs, private sector GDP and private sector wage and salary disbursements. Unless the point of Visioneering is to grow government, the measurements should only be of private sector elements.

KPI has explained how the mathematics of per-capita measures can produce results that seem paradoxical. A recent edition of Rich States, Poor States has a section devoted to these problems. Here’s an explanation of a scenario that requires caution to interpret:

Further, the residents of a state can be better off even if that state’s per-capita or median income decreases. If, for example, 50,000 low income agriculture workers move into Texas, those workers’ incomes almost surely rise (or else they would not have moved there). The residents and business owners in Texas who benefit from their labor services are better off, and the final result is that no one is worse off. But the per-capita income in Texas may actually go down if the low income agricultural workers earn less than the state’s average wage.

Wichita local government jobs grow, but slower growth seen in private sector jobs

Compared to peer cities, Wichita performs well in growth of local government jobs, but poorly in creating private sector jobs.

I’ve prepared statistics from the Bureau of Labor Statistics, U.S. Department of Labor for Wichita and two groups of peer cities. One group is our Visioneering peer cities. A second group includes those cities plus cities that Visioneers traveled to on official visits, plus a few others. The results are shown nearby. (Click on charts for larger versions, or click here to use the interactive visualization.) This data is annual data through the complete year 2013. The presentation of the data is indexed, so that each area starts at the same relative level and we can compare the relative growth over a period of years.

Local government job growth in Wichita compared to peer areas.
Local government job growth in Wichita compared to peer areas.
When we look at the growth of local government jobs, we see that Wichita does relatively well, usually in the top half of job growth compared to these peer areas.

Private sector job growth in Wichita compared to peer areas.
Private sector job growth in Wichita compared to peer areas.
Looking at private sector job growth, Wichita appears near the bottom. The private sector is growing very slowly in Wichita, compared to our peers. We must remember that it is the private sector that pays for government jobs and the other costs of government. When we couple slow growth of the private sector in Wichita with faster growth of local government jobs, we’re setting the stage for even slower growth of the type of jobs that produce prosperity.

Interestingly, Wichita performs better in private sector job growth than Springfield, Illinois. I chose to include that as a peer metropolitan area because that’s the immediate past city in which Gary Plummer worked. He was president of that city’s Chamber of Commerce, and is now president of the Wichita Metro Chamber of Commerce.

Wichita also does better than Wichita Falls, Texas. That city is the immediate past home of Tim Chase. He was the head of Wichita Falls Economic Development Corporation, and he’s now president of Greater Wichita Economic Development Coalition, a subsidiary of the Wichita Metro Chamber and the primary organization in charge of economic development for the Wichita area.

As Wichita prepares to make decisions regarding economic development — including a possible sales tax to fund economic development — we need to be aware of our recent history. Wichita leaders contend that Wichita can’t compete in economic development with other cities because the budget for incentives is too small. But when making this argument, these leaders don’t include all incentives that are available and used. As shown in the analysis Contrary to officials, Wichita has many incentive programs, the excuse that Wichita does not have incentives is not valid.

You may use the visualization yourself and draw your own conclusions. Click here to open it in a new window.

Wichita economic development incentives: Do they help?

The Wichita City Council regularly awards economic development incentives. Are these incentives helpful, or not?

Wichita City Budget Cover, 1971In November the Wichita City Council granted Industrial Revenue Bonds to Spirit Aerosystems.

The amount of the proposed bond issue was $49,000,000. The purpose of these IRBs is to allow the recipient to escape the payment of property taxes, and often sales taxes too. This action by the council may exempt up to $49,000,000 of property from taxation, both ad valorem (property) and sales. A 100 percent exemption is proposed for five years, plus a second five years if conditions are met.

The city uses benefit-cost ratios to justify its expenditures on economic development incentives. The reasoning is that by spending cash (such as on a forgivable loan) or forgiving taxes (as in the current case), the city (and county, state, and school district) gain even more than they give up. Generally, Wichita requires a benefit-cost ratio of 1.3 to 1 or better, although there are many exceptions and loopholes that are used if a potential deal doesn’t meet this criteria.

The council’s agenda packet gives benefit-cost ratios for the various taxing authorities, but it doesn’t list the dollar amounts of the tax abatements. Usually these dollar amounts are supplied.

One of the taxing jurisdictions affected by this proposed action is USD 260, the Derby school district, as the property is within its boundaries. In this case, the benefit-cost ratio given for the Derby school district is 1.00 to 1. Since the City of Wichita requires 1.3 to 1 or better for itself, by what right does the city impose a burden on a school district that it would not accept for itself? (The tax rate for Derby schools is 59.3 mills; while for the City of Wichita the rate is 32.5 mills.)

It’s important to note that the benefits claimed from the IRBs are in the form of increased taxes paid.

The harm of this incentive is that the taxes not paid by Spirit Aerosystems are shifted to other taxpayers. The money these taxpayers would have spent or invested is instead spent on taxes. Instead of people and businesses firms deciding how to spend or invest, Wichita City Hall does this for them. This brings into play a whole host of problems. These include the deficit of knowledge needed to make good investment decisions, decisions being made for political rather than economic reasons, and the corrosive influence of cronyism.

There is something the city could to do alleviate this problem. Would the city consider reducing its spending by the amount of tax being abated? In this case, the cost of these tax abatements will not be born by others. So far, the city has not considered this possibility.

Wichita’s management of incentives

Recent reporting told us what some have suspected: The city doesn’t manage its economic development efforts. One might have thought that the city was keeping records on the number of jobs created on at least an annual basis for management purposes, and would have these figures ready for immediate review. But apparently that isn’t the case.

We need to recognize that because the city does not have at its immediate disposal the statistics about job creation, it is evident that the city is not managing this effort. Or, maybe it just doesn’t care. This is a management problem at the highest level. Shouldn’t we develop our management skills of tax abatements and other economic development incentives before we grant new?

Wichita’s results in economic development

Wichita and Peer Job Growth, Total Employment
Despite the complaints of many that Wichita doesn’t have a rich treasure chest of incentives, the city has been granting tax abatements for years. What is the result? Not very good. Wichita is in last place in job creation (and other measures of economic growth) among our Visioneering peer cities. See here Wichita and Visioneering peers job growth.

If we believe that incentives have a place, then we have to ask why Wichita has done so poorly.

Particularly relevant to this applicant today: Boeing, its predecessor, received many millions in incentives. After the announcement of Boeing leaving in 2012, a new report contained this: “‘They weren’t totally honest with us,’ said [Wichita Mayor Carl] Brewer of Boeing, which has benefited from about $4 billion of municipal bonds and hundreds of millions of dollars in tax relief. ‘We thought the relationship was a lot stronger.'” Has anything changed?

A few remarks and questions about incentives

1. The benefits that government claims are not really benefits. Instead, they’re in the form of higher tax revenue. This is very different from the profits companies earn in voluntary market transactions.

2. Government claims that in order to get these “benefits,” the incentives must be paid. But often the new economic activity (expansion, etc.) would have happened anyway without the incentives.

3. Why is it that most companies are able to grow without incentives, but only a few companies require incentives? What is special about these companies?

4. If the relatively small investment the city makes in incentives is solely responsible for such wonderful outcomes in terms of jobs, why doesn’t the city do this more often? If the city has such power to create economic growth, why is anyone unemployed?

A diversified economy

wichita-detroit-job-industry-concentration
The mayor and council members have said that we need to diversify our economy. The award of incentives to Spirit Aerosystems reduces diversification. It gives special benefits worth millions to the largest company in our most concentrated industry. The costs of these incentives are born by other companies, especially entrepreneurs and start up companies. It’s these entrepreneurs and young companies that must be the source of diversity and dynamism in our economy.

(If we really believe that these incentives have no cost, why don’t we offer them more often? Think of how many companies go out of business each month. Many of them could be saved with just a little infusion of cash. Why doesn’t the city rescue these firms with incentives?)

Do incentives work?

The uncontroverted peer-reviewed research tells us that targeted economic development incentives don’t work, if we consider the entire economy. See: Research on economic development incentives. Some of the conclusions of the studies listed there include:

No evidence of incentive impact on manufacturing value-added or unemployment”

Small reduction in employment by businesses which received Ohio’s tax incentives”

No evidence of large firm impacts on local economy”

No permanent employment increase across a quasi-experimental panel of all Cabela’s stores”

“Employment impact of large firms is less than gross job creation (by about 70%)”

These research programs illustrate the fallacy of the seen and the unseen. It is easy to see the jobs being created by economic development incentives. It’s undeniable that jobs are created at firms that receive incentives, at least most of the time. But these jobs are easy to see. It’s easy for news reporters to find the newly-hired and grateful workers, or to show video footage of a new manufacturing plant.

But it’s very difficult to find specific instances of the harm that government intervention produces. It is, generally, dispersed. People who lose their jobs usually don’t know the root cause of why they are now unemployed. Businesses whose sales decline often can’t figure out why.

But evidence tells us this is true: These incentives, along with other forms of government interventionism, do more harm than good.

Can officials manage growth?

Alan Peters and Peter Fisher wrote an academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. 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.

In 2008 Kansas Legislative Division of Post Audit investigated spending on economic development. It found about the same as did Peters and Fisher.

Going forward

Politicians and bureaucrats promote programs like this tax abatement as targeted investment in our economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Wichita and Kansas economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies and awarding incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘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.'”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

Wichita not good for small business

The Wichita Business Journal reports today:

When it comes to having good conditions to support small businesses, well, Wichita isn’t exactly at the top of the list, according to a new ranking from The Business Journals.

In fact, the Wichita metro area’s small-business vitality score is nearly at the bottom — 99th out of the 101 U.S. metro areas included in the study. (Wichita near bottom for small-business vitality score, April 2, 2014)

Many in Wichita don’t want to recognize and confront the bad news about the performance of the Wichita-area economy. Last year, when presenting its annual report to local governmental bodies, the leaders of Visioneering Wichita would not present benchmark data to elected officials.

wichita-peer-job-growth-1990-2014-01

So what is the record of the Wichita metropolitan area regarding job creation, that seeming to be the most popular statistic our leaders cite and promote? I’ve prepared statistics from the Bureau of Labor Statistics, U.S. Department of Labor for Wichita and a broad group of peer cities. I included our Visioneering peer cities, cities that Visioneers traveled to on official visits, and a few others. The result, shown nearby, is not pretty. (Click on charts for larger versions, or click here to use the interactive visualization)

wichita-peer-job-growth-2007-2014-01

If we look at job creation starting in 1990, Wichita lags behind our Visioneering peers, but not behind all the peer cities that I selected. Wichita does better than Springfield, Illinois, for example. I chose to include that as a peer metropolitan area because that’s the immediate past city that Gary Plummer worked in. He was president of that city’s Chamber of Commerce, and is now president of the Wichita Chamber. Note the position of Springfield: Last place.

In next-to-last place we see Wichita Falls, Texas. I chose to include it because it is the immediate past home of Tim Chase. He was the head of Wichita Falls Economic Development Corporation. He’s now president of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development for the Wichita area.

In second-to-last place we see Pittsburgh, which I added because Visioneering leaders recently made a visit there.

Then, we come to Wichita.

If we look at job creation since 2007 we find Wichita in a common position: Last place in job creation, and by a wide margin except for two cities. One is Wichita Falls, where our present GWEDC president recently worked. The other city that barely out-performs Wichita is Chattanooga, which I included because Visioneering civic leaders recently traveled there to learn from that city.

Over the decades in which Wichita has performed poorly, there have been a few common threads. Carl Brewer has been council member or mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for decades. At Sedgwick County, manager William Buchanan has held that position for more than two decades. On the Sedgwick County Commission, Dave Unruh has been in office since 2003, and Tim Norton since 2001. It is these officials who have presided over the dismal record of Wichita.

Wichita City Manager Robert Layton has had less time to influence the course of economic development in Wichita. But he’s becoming part of the legacy of Wichita’s efforts in economic development.

toolbox-29058_640

These leaders often complain that Wichita does not have enough “tools in the toolbox” to compete with other cities in economic development. Wichita does, however, have and use incentives. The State of Kansas regularly offers incentives so generous that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.

Incentives: We have them. They haven’t worked for us.

It is nearly certain that this year Wichitans will be asked to approve a higher sales tax in order to pay for many things, including the more aggressive approach to job creation that Brewer mentioned. Based on the track record of our elected officials and bureaucrats, we need to do this: Before approving the tax and expenditures, Wichitans need to take a long look at the people who have been in charge, and ask what will be different going forward.

Wichita’s growth in gross domestic product

Wichita City HallCompared to peer areas, Wichita’s record of growth in gross domestic product is similar to that of job creation: Wichita performs poorly.

Looking at growth in GDP, Wichita lags behind the metropolitan statistical areas that we consider our peers (according to Visioneering Wichita), but not behind all the peer cities that I selected. Wichita does better than Springfield, Illinois, for example. I chose to include that as a peer metropolitan area because that’s the immediate past city that Gary Plummer worked in. He was president of that city’s Chamber of Commerce, and is now president of the Wichita Metro Chamber of Commerce.

Wichita also does better than Wichita Falls, Texas. That city is the immediate past home of Tim Chase. He was the head of Wichita Falls Economic Development Corporation. He’s now president of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development for the Wichita area.

What Wichita is missing

If the Wichita-area GDP grew faster, Wichita could generate many more jobs.

growth-gdp-metropolitan-area-wichita-2012-01From 2001 to 2012, Wichita GDP grew at a rate of 0.734 percent per year, compounded annually. U.S. Metropolitan areas, as a whole, managed 1.571 percent growth over the same period. That seems like a small difference, just 0.837 percentage points. But over time, compounding adds up, so to speak. Here’s what it could amount to.

GDP in the Wichita MSA in 2012 was $29,644 million (current dollars). For that year the number of people working averaged 285,600, so each job contributed, on average, $103,796 to GDP.

A metropolitan area the size of Wichita that grew at the historic growth rate of all U.S. Metropolitan areas would be producing an additional $2,751 million in GDP in ten years, compared to a metropolitan area growing at Wichita’s historical rate. That could mean an additional 26,000 jobs.

Using the visualization.
Using the visualization.
If you’d like to use the interactive visualization of metropolitan GDP data, you may click here to open it in a new window. Data is from U.S. Bureau of Economic Analysis along with author’s own calculations. Visualization created using Tableau Public.

For Wichita’s economic development machinery, failure

Delano Clock Tower, WichitaCompared to a broad group of peer metropolitan areas, Wichita performs very poorly. As Wichita embarks upon a new era of economic development, we need to ask who to trust with this important task.

The good news: In a recent op-ed, Wichita Mayor Carl Brewer wrote that the city needs to make a decision regarding “A more aggressive approach to job creation.” (Carl Brewer: Wichita can have a great next year, December 22, 2013 Wichita Eagle)

The bad news: Wichita has performed very poorly in job creation in recent decades, and even if we decide on a more aggressive approach, pretty much the same crew is in charge.

Many in Wichita don’t want to recognize and confront the bad news about the performance of the Wichita-area economy. Last year, when presenting its annual report to local governmental bodies, the leaders of Visioneering Wichita would not present benchmark data to elected officials.

Some, however, have recognized the severity of the problem. In 2008 Harvey Sorensen, who has been chair of Visioneering Wichita, chair of the Wichita Metro Chamber of Commerce, and has held other civic leadership positions, wrote in the pages of the Wichita Eagle: “We are losing ground competitively with our peer communities.” (Community Needs a Common Vision, August 24, 2008 Wichita Eagle)

wichita-peer-job-growth-1990-2014-01

So what is the record of the Wichita metropolitan area regarding job creation, that seeming to be the most popular statistic our leaders cite and promote? I’ve prepared statistics from the Bureau of Labor Statistics, U.S. Department of Labor for Wichita and a broad group of peer cities. I included our Visioneering peer cities, cities that Visioneers traveled to on official visits, and a few others. The result, shown nearby, is not pretty. (Click on charts for larger versions, or click here to use the interactive visualization)

wichita-peer-job-growth-2007-2014-01

If we look at job creation starting in 1990, Wichita lags behind our Visioneering peers, but not behind all the peer cities that I selected. Wichita does better than Springfield, Illinois, for example. I chose to include that as a peer metropolitan area because that’s the immediate past city that Gary Plummer worked in. He was president of that city’s Chamber of Commerce, and is now president of the Wichita Chamber. Note the position of Springfield: Last place.

In next-to-last place we see Wichita Falls, Texas. I chose to include it because it is the immediate past home of Tim Chase. He was the head of Wichita Falls Economic Development Corporation. He’s now president of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development for the Wichita area.

In second-to-last place we see Pittsburgh, which I added because Visioneering leaders recently made a visit there.

Then, we come to Wichita.

If we look at job creation since 2007, the year before Sorensen wrote his op-ed, we find Wichita in a common position: Last place in job creation, and by a wide margin except for two cities. One is Wichita Falls, where our present GWEDC president recently worked. The other city that barely out-performs Wichita is Chattanooga, which I included because Visioneering civic leaders recently traveled there to learn from that city.

Over the decades in which Wichita has performed poorly, there have been a few common threads. Brewer has been council member or mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for decades. At Sedgwick County, manager William Buchanan has held that position for more than two decades. On the Sedgwick County Commission, Dave Unruh has been in office since 2003, and Tim Norton since 2001. It is these officials who have presided over the dismal record of Wichita.

Wichita City Manager Robert Layton has had less time to influence the course of economic development in Wichita. But he’s becoming part of the legacy of Wichita’s efforts in economic development.

toolbox-29058_640

These leaders often complain that Wichita does not have enough “tools in the toolbox” to compete with other cities in economic development. Wichita does, however, have and use incentives. The State of Kansas regularly offers incentives so generous that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.

Incentives: We have them. They haven’t worked for us.

It is nearly certain that this year Wichitans will be asked to approve a higher sales tax in order to pay for many things, including the more aggressive approach to job creation that Brewer mentioned. Based on the track record of our elected officials and bureaucrats, we need to do this: Before approving the tax and expenditures, Wichitans need to take a long look at the people who have been in charge, and ask what will be different going forward.

Wichita economic development: Worth higher taxes?

In this excerpt from WichitaLiberty.TV: Wichita city and business leaders are likely to ask Wichitans to support a higher sales tax in order to support additional economic development efforts. Should Wichitans vote in favor of this? View below, or click here to view at YouTube.

Another thing that a tax increase in Wichita might be used for is for economic development. That is, paying subsidies to companies so that they will provide jobs in Wichita.

wichita-chamber-job-growth-2013-12
It’s felt that Wichita needs to step up its economic development efforts because things haven’t been going well lately. Not that everyone agrees. You’ve seen the charts I showed you, showing the growth of jobs in Wichita and also other economic indicators. When we compare Wichita with the nation as a whole and with our Visioneering peer cities, Wichita is almost always in last place. When I presented this data to the Wichita city Council, the Council members did not believe these numbers. So here’s a chart that was presented recently at a Wichita Metro Chamber of Commerce meeting. It uses the same data source that I use, the Bureau of Economic Analysis, and it shows the same data using the same methodology. It comes to the same conclusion: Wichita performs poorly.

Our chamber of commerce and its leadership will use this poor performance to argue that Wichita needs to spend more money on economic development. And that’s a problem.

Your chamber of commerce radio buttons
Very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that allow free enterprise and genuine capitalism to flourish.

Now you may be confused. Most people probably think that local chambers of commerce, since their membership is mostly business firms, support pro-growth policies that embrace limited government and free markets. But that’s not always the case. Here, in an excerpt from his Wall Street Journal article “Tax Chambers” Stephen Moore explains:

“The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government.

“In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes, state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.”

This is the argument that the Wichita Chamber of Commerce and the city council will be making: We don’t spend enough on business welfare. Capitalism and the free market: These things don’t work, they will tell us. Only government can save Wichita from decline. Business leaders will tell us we need more taxes for more spending on economic development. But be careful here:

There’s a difference between “business leaders” and “capitalists.”

Last year Charles Koch explained the difference in an article in the Wall Street Journal. He wrote:

“Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

He continued:

“The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In his article, Koch makes an important observation when he defines cronyism: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”

You regular viewers know that we have a problem with cronyism in Wichita. This is exemplified by incidents like where a mayor votes to send millions of taxpayer dollars to a man who owns movie theaters, and then the mayor sells his barbeque sauce in those theaters. It’s when a real estate developer lists the mayor and city manager as business references when bidding for a city project and thinks that no one will care or notice. It’s when a city council member receives thousands in campaign contributions from an out-of-state construction company right at the time he votes to award a contract to that company. It’s when the city council votes to give over-priced no-bid construction contracts to their significant campaign contributors.

In other words, instead of allowing people to direct resources to where they believe they will be most useful, our local government direct resources to their cronies. Where it’s useful for their political careers.

I’m of the opinion that it has harmed Wichita’s economic growth. It’s one of the reasons why Wichita is the bottom line in the charts we’ve seen. But many of our business leaders, and almost all of our political leaders, propose more of the same.

That’s right. Instead of focusing on things like water and sewer pipes, government wants to raise taxes so that it can direct more of our economy. Having neglected our water and sewer infrastructure to the point where the mayor says we need to spend at the rate of $70 million dollars per year for the next 30 years, our city leaders are going to ask us for more tax money so that they can try to fix the Wichita economy.

Returning to Stephen Moore’s article. Here he quotes Jon Caldera of the Independence Institute. “I used to think that public employee unions like the National Education Association were the main enemy in the struggle for limited government, competition and private sector solutions. I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”

Let’s ask our business and political leaders some questions. First, will we acknowledge Wichita’s poor economic performance, or will we continue to ignore the facts and statistics? Second: Will we realize that the cozy relationship between city hall and a small group of insiders — Wichita’s cronies, if you will — is harmful and corrosive? Third: Will we realize that free enterprise and capitalism work better than cronyism?

In Wichita, ‘free markets’ used to justify business welfare

Wichita City HallIncredibly, a prominent Wichita business uses the free market to justify its request for economic development incentives. A gullible city council buys the argument.

At the December 10, 2013 meeting of the Wichita City Council, Bombardier LearJet received an economic development incentive that will let it avoid paying some property taxes on newly-purchased property. The amount involved in this particular incident is relatively small. According to city documents, “the value of the abated taxes on that investment could be as much as $1,980.”

(Bombardier receives millions each year in other government subsidies; see Kansas PEAK program: corporate welfare wrapped in obfuscation and Bombardier Learjet should pay just a little for examples.)

While the amount of the incentive granted in the December 10 action is small, the meeting was useful in letting us understand how some prominent members of Wichita’s business community have distorted the principles of free markets and capitalism. As illustrated by the fawning of Wichita City Council Member and Vice Mayor Pete Meitzner (district 2, east Wichita) and others, elected officials have long forsaken these ideas.

Bombardier’s argument

Don Pufahl, who is Director of Finance at Bombardier Learjet, addressed the council regarding this matter. He started his remarks on a positive note, telling the council “There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.”

We must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the flip side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.

But in the field of economic development as practiced by government, incentive means something given to or granted to a company. That’s what the representative from Bombardier meant by incentive. He explained: “One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.”

A few thoughts: First, Bombardier is not investing in the community. The company is investing in itself.

Second, the free market system that the speaker seemed to praise is a system based on voluntary exchange. That flows from property rights, which is the fundamental idea that people own themselves and the product of their labor, and are free to exchange with others, or to not exchange. But when government uses incentives, many people do not consent to the exchange. That’s not a free market system.

Third, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In the same article Koch wrote: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.” (Charles G. Koch: Corporate cronyism harms America)

The representative from Bombardier also said that the city’s incentives would reduce Bombardier’s investment risk. There is little doubt this is true. What has happened, however, is that the risk has not been eliminated or reduced. It has merely been shifted to the people of Wichita, Sedgwick County, the Wichita public school district, and the State of Kansas. When government does this on a piecemeal basis, this is called cronyism. When done universally, we call this socialism.

We can easily argue that actions like this — and especially the large subsidies granted to Bombardier the by state — increase the risk of these investments. Since the subsidies reduce the cost of its investment, Bombardier may be motivated to make risky investments that it might otherwise not make, were it investing its own funds (and that of its shareholders).

The cost of Bombardier’s investments, and the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Now the city and Bombardier will say that these investments have a payoff for the taxpayer. That is, if Bombardier grows, it will pay more in taxes, and that constitutes “profit” for taxpayers. Even if we accept that premise — that the city “profits” from collecting taxes — why do we need to invest in Bombardier in order to harvest its “profits” when there are so many companies that pay taxes without requiring subsidy?

Finally, the representative from Bombardier said that these incentives are not a handout. I don’t see how anyone can say that and maintain a straight face.

wichita-chamber-job-growth-2013-12
It would be one thing if the Wichita area was thriving economically. But it isn’t. We’re in last place among our self-identified peers, as illustrated in Wichita and Visioneering peers job growth. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation.”

Following is a fuller representation of the Bombardier representative’s remarks to the council.

There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.

One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.

As the company moves forward to invest in the community, those investments are not without risk. … Your incentives allow us to offset some of that risk so that we can move forward with those investments, which hopefully create new jobs and also then also improves the quality of life in our community. … These incentives are not a handout. They are a way that the local government uses such things to offset some of the risk that is involved in local companies as they invest in the community, bring jobs to the community, and improve the community overall.


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Employment visualization updated; Wichita still in last place

city-council-chambers-sign-smallWichita continues to lag behind its peer cities in job growth, according to data from the Bureau of Labor Statistics.

The interactive visualization referenced below lets you select any number of metropolitan areas (or states) and track progress in job growth.

employment-growth-visioneering-2013-12

The nearby chart shows Wichita and its Visioneering peer cities (click on charts for larger versions). For about the last ten years Wichita has been in last place in job growth, and by no small margin. It wasn’t always that way. Results like this should cause us to question our economic development strategies and the people and organizations we have charged with managing this effort.

wichita-chamber-job-growth-2013-12

This poor performance of Wichita compared to peers has not gone unnoticed. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation. To improve our local economy we have to add new economic engines to the aviation sector thereby insulating the regional economy from future massive fluctuations.”

Data is from the Bureau of Labor Statistics of the U.S. Department of Labor. Visualization created by myself using Tableau Public. Click here to open the visualization in a new window.

kansas-employment-sample-2013-12

Wichita-area income growth

visualization-example-smallData for income in the nation’s metropolitan statistical areas is now available for 2012, so I’ve updated some visualizations with the recent data. This visualization presents three statistics: Population, personal income, and per capita personal income. For each measurement, I present the relative change from the previous year, but also the compound rate of growth. The latter lets us see the effect of long term trends compounded over time, rather than what may have happened in any single year.

(There are some issues related to per capita measures that require caution; see Wichita and peer GDP growth for an explanation.)

The charts, in their initial presentation, show the Wichita metropolitan area and our Visioneering peer areas. (You may add or remove other areas as you wish.) The unfortunate conclusion that we must draw from this data is that Wichita has not done well. In fact, Wichita is in last place among our Visioneering-identified peer areas.

Others have noticed this poor performance; see Wichita in the bottom quintile in national economic index from the Wichita Business Journal for a recent example.

Click here to open the visualization in a new window.

(Data is from U.S. Bureau of Economic Analysis along with author’s own calculations. Visualization created using Tableau Public.)

Personal Income, Compound Growth

Cessna, another Wichita company asking for tax relief

Wichita City HallThis week the Wichita City Council will consider granting economic development incentives to Cessna Aircraft Company. The incentives are in the form of property (ad valorem) tax relief, implemented through the city’s Industrial Revenue Bond program, as described by city documents:

Since 1991, the City Council has approved issuance of Industrial Revenue Bonds (“IRBs”) totaling $1.2 billion to finance expansion and modernization of Cessna Aircraft Company (“Cessna”) facilities in Wichita. The City Council also authorized 100% ad valorem tax exemptions for all bond-financed property for periods of up to ten years.

The city does this for economic development, which in the eyes of politicians and bureaucrats, means jobs. Highly visible jobs, hopefully, that voters will be grateful for. So we might want to examine the record of job creation by Wichita’s economic development machinery. (We should note that Cessna is not the only aircraft company that Wichita has been generous to with subsidy.)

The Bureau of Economic Analysis, which is part of the U.S. Chamber of Commerce, provides economic data for metropolitan areas. One of the measures that Visioneering Wichita uses as a benchmark of performance is personal income growth. Specifically, per capita personal income growth. There are some issues related to per capita measures that require caution; see Wichita and peer GDP growth for an explanation.

personal-income-compound-growth-visioneering-peers-2012-11

Considering personal income growth, here is what Wichita looks like compared to our Visioneering peer cities, based on data from BEA (click on charts for larger versions).

This chart shows the compound annual growth rate in job creation. Note that Wichita, the violet line, is in last place. But it wasn’t always that way. It was during the decade of the 1990s that Wichita started to slip to last place. Coincidentally, that is the decade in which Wichita started offering economic development incentives to Cessna.

per-capita-personal-income-compound-growth-visioneering-peers-2012-11

Since Visioneering uses per capita personal income, I also present it. This time, I start the chart with 1990 data. It’s much the same story as the previous chart: Wichita is in last place.

Another benchmark Visioneering uses (but won’t present to the council) is job growth. Wichita does poorly here too, ranking in last place among our Visioneering peer cities except in one area: Government jobs. See Wichita job growth and Visioneering peers for details and a video. We should note that to the extent the government sector grows faster than the private sector, we become poorer.

We might ask the mayor and council members how this proposed action will help Wichita catch up to its self-identified peers. After all, city documents state that we’ve granted IRBs to Cessna in the past: $1,200,000,000 worth, according to city documents. The action contemplated this week is for up to $40,200,000 in bonds, or about three percent of the total granted to Cessna. These amounts are not loans to Cessna from the city, but instead represent the value of property that Cessna may have exempted from taxation: property and possibly sales taxes both.

Other companies have received similar treatment, and not always with good results. After the announcement of Boeing leaving in 2012, a news report contained this: “‘They weren’t totally honest with us,’ said [Wichita Mayor Carl] Brewer of Boeing, which has benefited from about $4 billion of municipal bonds and hundreds of millions of dollars in tax relief. ‘We thought the relationship was a lot stronger.'”

The problem with this action

A major reason why this action is harmful to the Wichita economy is its strangling effect on entrepreneurship and young companies. As Cessna and other similarly-situated companies escape paying taxes, others have to pay. This increases the burden of the cost of government on everyone else — in particular on the companies we need to nurture. This is being brought into sharp relief as the council considers asking Wichita voters to approve a sales tax increase.

Last month the Wichita Metro Chamber of Commerce featured a speaker who stressed the importance of entrepreneurship, as evidenced by the headline in the Wichita Eagle: Gallup CEO tells Wichita Chamber: Treat entrepreneurs like star athletes.

There’s plenty of other evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by this action the council is considering, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Wichita economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form. Young entrepreneurial companies are particularly vulnerable.

Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘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.'”

(For a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view, see Research on economic development incentives. A sample finding is “General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates for everyone is an example of such a policy. Abating taxes for specific companies through programs like the Wichita city council is considering for Cessna is an example of precisely the wrong policy.

In explaining the importance of dynamism, Hall wrote: “Generally speaking, dynamism represents persistent, annual change in about one-third of Kansas jobs. Job creation may be a key goal of economic development policy but job creation is a residual economic outcome of business dynamism. The policy challenge centers on promoting dynamism by establishing a business environment that induces business birth and expansion without bias related to the size or type of business.”

We need to move away from economic development based on this active investor approach, especially the policies that prop up our established companies to the detriment of dynamism. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

In Wichita, the case for business welfare

Wichita City HallOn Tuesday the Wichita City Council will consider granting an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. Let’s take a look at some of the aspects of this company’s application and the city’s agenda packet material (available here).

In its application letter, High Touch argues as follows (emphasis added):

To demonstrate our commitment to Wichita, as well as accommodate our expected growth plans, High Touch Technologies would like to purchase a 106,000 sq. ft. building in Downtown Wichita.

At this time, High Touch Technologies is requesting your support for the issuance of approximately $2,000,000 City of Wichita, Kansas, Taxable Industrial Revenue Bonds. High Touch greatly appreciates any support we can receive on the purchase of this office building through the City’s participation of Industrial Revenue Bonds and the property tax savings associated with this financing method. We intend to continue our growth and expansion over the next several years and these benefits would be helpful in offsetting the substantial capital requirements associated with this project.

High Touch Technologies believes in Wichita and support the community and its economy through corporate stewardship programs. We look forward to working with you and Members of the Council on this project and are always available to answer questions regarding this project or any of our business activities.

Later in the letter:

The applicant agrees to enter into an agreement for Payment in Lieu of Taxes (PILOT) equal to the ad valorem property tax payment amount for the 2013 tax year. The applicant respectfully requests that the payments be capped at that rate for a period of ten (10) years. The tax abatement will permit the applicant to proceed with the anticipated project, allow for its anticipated growth, and result in the public benefits otherwise outlined herein.

The issuance of Industrial Revenue Bonds will be used to lower the cost of office space in the acquired building. The lower costs will give High Touch, Inc. incentive to grow its presence in the corporate office in Wichita. New employees will be added to this Wichita office instead of other offices across the U.S. The savings in office space will allow High Touch, Inc. to use those savings for expansion.

Some remarks:

To demonstrate our commitment to Wichita: This is ironic because High Touch is asking to be excused from paying the same property taxes that most other people and business firms have to pay. Instead of commitment, this demonstrates hostility to the taxpayers of Wichita, who will have to pay more so that this company can pay less.

helpful in offsetting the substantial capital requirements: Well. Who wouldn’t appreciate help in offsetting the cost of anything? I think we can categorize this as unpersuasive.

corporate stewardship programs: Underlying this argument is that because High Touch makes charitable contributions, it should be excused from the same tax burden that most of us face. Here’s a better argument: Be a good corporate citizen by paying your fair share of taxes, don’t ask the city government to force be to subsidize your business, and let me make my own charitable contributions.

answer questions regarding this project or any of our business activities: This refers to how the members of the city council will make a judgment that this business is worthy of subsidy, and that others may not be. The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has taught that it is through markets and their coordination of dispersed knowledge that we learn where to direct capital investment. It is simply impossible for this city government to effectively decide which companies Wichitans should invest their tax dollars in. It will still make that decision, however.

Payment in Lieu of Taxes (PILOT): High Touch is not proposing to totally escape its tax burden. Only partially so, through the PILOT. But the proposed payment is quite generous to the company. A few quick (and probably incorrect) calculations shows how small the PILOT is compared to what taxes would be. City documents indicate the proceeds of the IRBs will be used to pay for $2,000,000 of improvements. This amount of commercial property times 25% assessment ratio times 120.602 mill levy rate equals $60,301 in taxes. High Touch, through the PILOT, is proposing to pay $33,250, just a little more than half of what the taxes might be.

But the true value of the taxes being avoided is probably much higher. As an example, nearby office space is listed for sale at $28 per square foot, and that’s a distress-level price. Applying that price to this building, its value would be almost $3 million. If we look at market capitalization rates, which are generally given as from nine to eleven percent for class A space, we arrive at a much higher value: If we say $10 per square foot rental rate times 106,000 square feet at nine percent cap rate, the value would be almost $12 million. Taxes on that would be about $300,000 per year.

These are back-of-the-envelope calculations using assumed values that may not be accurate, but this gives an idea of what’s actually happening in this transaction: High Touch is seeking to avoid paying a lot of taxes, year after year.

payments be capped at that rate for a period of ten (10) years: High Touch proposed that what it’s paying in lieu of taxes not be subject to increases. Everyone else’s property taxes, of course, are subject to increases due to either assessed value increases or mill rate increases, or both. High Touch requests an exemption from these forces that almost everyone else faces.

lower the cost of office space: Again, who wouldn’t enjoy lower business or personal expenses? The cost of this incentive spreads the cost of government across a smaller tax base than would otherwise be, raising the cost of government for almost everyone else.

added to this Wichita office instead of other offices across the U.S.: The threat of relocation or expansion elsewhere is routinely used to leverage benefits from frightened local governments. These threats can’t be taken at face value. There is no way to know their validity.

use those savings for expansion: Implicit in this argument is that Wichita taxes prevent companies from expanding. True or not, this is a problem: If taxes are too high, we’re missing out on economic growth. If taxes are not too high, but some companies seek exemption from paying them nonetheless, that’s a problem too.

A prosperous company, establishing the template for seeking business welfare

In a December 2011 interview with the Wichita Eagle, the High Touch CEO bragged of how well the company is doing. The newspaper reported “Ask Wayne Chambers how business is, and he’s going to tell you it’s good. Very good. … Chambers said this week that after two years of robust growth, he’s looking for another one in 2012. ‘We have every reason to believe we’ll continue that growth pattern,’ he said.”

In February 2013 the Wichita Business Journal reported “It should be a great year for High Touch Inc. That’s the initial prediction of CEO Wayne Chambers, who says actions the company took during and leading up to 2012 have positioned High Touch to become a true ‘IT solutions provider.'”

If we take Chambers at his word, why does High Touch need this business welfare? Economic necessity is usually given as the justification of these incentives. Companies argue that there is no way the proposed investment is economic without taxpayer participation and subsidy. I don’t see this argument being advanced in this case.

Wichita and peer per capita income, Visioneering

Interestingly, Chambers is currently co-chair of Visioneering Wichita, which advocates for greater government involvement in just about everything, including the management of the local economy. One of the benchmarks of Visioneering is “Exceed the highest of the annual percentage job growth rate of the U.S., Omaha, Tulsa, Kansas City and Oklahoma City.” As shown in this article and this video, Wichita badly lags the nation and our Visioneering peer cities on this benchmark. Visioneering officials didn’t want to present these results to government officials this year, perhaps on the theory that it’s better to ignore problems that to confront them.

Now Chambers is slated to be the next chair of the Wichita Metro Chamber of Commerce. It’s quite likely that the Chamber, under his leadership, will soon recommend that Wichitans pay higher sales and/or property taxes to support the Chamber’s goals.

These are the same taxes that Chambers’ company is asking to be excused from paying. Will this blatant cronyism be the template for next year’s management of economic development in Wichita? Let’s hope not, as the working people of Wichita can’t tolerate much more of our sub-par economic growth.

Spirit Aerosystems applies for tax relief

Wichita City HallThe Wichita City Council will consider excusing a large company from property and sales taxation. Is this action wise for the city’s economy?

Tomorrow the Wichita City Council will consider granting Industrial Revenue Bonds to Spirit Aerosystems, the city’s largest employer.

The amount of the proposed bond issue is $49,000,000. The purpose of the IRBs is to allow the recipient to escape the payment of property taxes, and often sales taxes too. This action by the council may exempt up to $49,000,000 of property from taxation, both ad valorem (property) and sales. A 100 percent exemption is proposed for five years, plus a second five years if conditions are met.

The city uses benefit-cost ratios to justify its expenditures on economic development incentives. The reasoning is that by spending cash (such as on a forgivable loan) or forgiving taxes (as in the current case), the city (and county, state, and school district) gain even more than they give up. Generally, Wichita requires a benefit-cost ratio of 1.3 to 1 or better, although there are many exceptions and loopholes that are used if a potential deal doesn’t meet this criteria.

The council’s agenda packet gives benefit-cost ratios for the various taxing authorities, but it doesn’t list the dollar amounts of the tax abatements. Usually these dollar amounts are supplied.

One of the taxing jurisdictions affected by this proposed action is USD 260, the Derby school district, as the property is within its boundaries. In this case, the benefit-cost ratio given for the Derby school district is 1.00 to 1. Since the City of Wichita requires 1.3 to 1 or better for itself, by what right does the city impose a burden on a school district that it would not accept for itself? (The tax rate for Derby schools is 59.3 mills; while for the City of Wichita the rate is 32.5 mills.)

It’s important to note that the benefits claimed from the IRBs are in the form of increased taxes paid.

The harm of this incentive is that the taxes not paid by Spirit Aerosystems are shifted to other taxpayers. The money these taxpayers would have spent or invested is instead spent on taxes. Instead of people and businesses firms deciding how to spend or invest, Wichita City Hall does this for them. This brings into play a whole host of problems. These include the deficit of knowledge needed to make good investment decisions, decisions being made for political rather than economic reasons, and the corrosive influence of cronyism.

There is something the city could to do alleviate this problem. Would the city consider reducing its spending by the amount of tax being abated? In this case, the cost of these tax abatements will not be born by others.

Wichita’s management of incentives

Recent reporting told us what some have suspected: The city doesn’t manage its economic development efforts. One might have thought that the city was keeping records on the number of jobs created on at least an annual basis for management purposes, and would have these figures ready for immediate review. But apparently that isn’t the case.

We need to recognize that because the city does not have at its immediate disposal the statistics about job creation, it is evident that the city is not managing this effort. Or, maybe it just doesn’t care. This is a management problem at the highest level. Shouldn’t we develop our management skills of tax abatements and other economic development incentives before we grant new?

Wichita’s results in economic development

Wichita and Peer Job Growth, Total Employment
Despite the complaints of many that Wichita doesn’t have a rich treasure chest of incentives, the city has been granting tax abatements for years. What is the result? Not very good. Wichita is in last place in job creation (and other measures of economic growth) among our Visioneering peer cities. See here Wichita and Visioneering peers job growth.

If we believe that incentives have a place, then we have to ask why Wichita has done so poorly.

Particularly relevant to this applicant today: Boeing, its predecessor, received many millions in incentives. After the announcement of Boeing leaving in 2012, a new report contained this: “‘They weren’t totally honest with us,’ said [Wichita Mayor Carl] Brewer of Boeing, which has benefited from about $4 billion of municipal bonds and hundreds of millions of dollars in tax relief. ‘We thought the relationship was a lot stronger.'” Has anything changed?

A diversified economy

wichita-detroit-job-industry-concentration
The mayor and council members have said that we need to diversify our economy. This action contemplated this week reduces diversification. It gives special benefits worth millions to the largest company in our most concentrated industry. The costs of these incentives are born by other companies, especially entrepreneurs and start up companies. It’s these entrepreneurs and young companies that must be the source of diversity and dynamism in our economy.

(If we really believe that these incentives have no cost, why don’t we offer them more often? Think of how many companies go out of business each month. Many of them could be saved with just a little infusion of cash. Why doesn’t the city rescue these firms with incentives?)

Do incentives work?

The uncontroverted, peer-reviewed research tells us that targeted economic development incentives don’t work, if we consider the entire economy. See: Research on economic development incentives. Some of the conclusions of the studies listed there include:

No evidence of incentive impact on manufacturing value-added or unemployment”

Small reduction in employment by businesses which received Ohio’s tax incentives”

No evidence of large firm impacts on local economy”

No permanent employment increase across a quasi-experimental panel of all Cabela’s stores”

“Employment impact of large firms is less than gross job creation (by about 70%)”

These research programs illustrate the fallacy of the seen and the unseen. It is easy to see the jobs being created by economic development incentives. It’s undeniable that jobs are created at firms that receive incentives, at least most of the time. But these jobs are easy to see. It’s easy for news reporters to find the newly-hired and grateful workers, or to show video footage of a new manufacturing plant.

But it’s very difficult to find specific instances of the harm that government intervention produces. It is, generally, dispersed. People who lose their jobs usually don’t know the root cause of why they are now unemployed. Businesses whose sales decline often can’t figure out why.

But uncontroverted evidence tells us this is true: These incentives, along with other forms of government interventionism, do more harm than good.

Can officials manage growth?

Alan Peters and Peter Fisher wrote an academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. 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.

In 2008 Kansas Legislative Division of Post Audit investigated spending on economic development. It found about the same as did Peters and Fisher.

Going forward

Politicians and bureaucrats promote programs like this tax abatement as targeted investment in our economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Wichita and Kansas economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘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.'”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.