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Reforming economic development in Wichita

In this excerpt from WichitaLiberty.TV: Can we reform economic development in Wichita to give us the growth we need? View below, or click here to view at YouTube. Originally broadcast May 10, 2015.

An incentives deal for a Wichita company illustrates a capacity problem and the need for reform.

This week the Wichita City Council considered and passed an economic development incentives package intended to enable a local manufacturing company to expand its operations. What the council did was to grant the company a 91 percent discount on property taxes on the expansion. Because of Kansas state law, the city, by its own action, is able to offer this discount not only for its own property taxes, but also for property taxes that would otherwise go to the county, school district, and state.

City documents gave some detail regarding the amounts of property tax to be forgiven on an annual basis, for a period of up to ten years. It’s about twenty nine thousand dollars per year. Reading the city council agenda packet, you might conclude that the only incentive the company is receiving is this property tax relief. But other sources indicate the company is applying to receive benefits under two state programs. These are known as PEAK and HPIP. We don’t know how much the company may benefit from these programs. That information is simply not available.

What I’d like you to know and remember is that in the past, city documents have often mentioned other state, county, or federal incentives the company will received, and often the amounts were given. But in recent economic development items presented to the city council, that information is no longer given. The names of other incentive programs are not mentioned.

This may seem like a small matter, but I think it’s important, for two reasons. First, the city tells us it wants to operate in a transparent manner. The city actually believes it operates in a transparent manner. But no, not here in this case. All the city has to do is to mention the names of the other programs the company is applying for. That would be a start.

Then, this is also important because the city and our local economic development officials constantly tell us that Wichita has very few tools for awarding economic development incentives. By leaving out incentives offered by the state or other jurisdictions, the city promotes this false narrative.

Here’s another aspect of our economic development policies that is important. In order to prepare the incentives package, several events took place. There was a visit to the company. Then another visit and tour. Then economic development officials helped the company apply for benefits from the Kansas Department of Commerce. Then these officials worked closely with Wichita city staff on an incentive package.

And what is the result of all that effort? City documents state that the expansion will create 28 jobs over the next five years. Obtaining these jobs took a lot of effort from Wichita and Kansas economic development machinery. Multiple agencies and fleets of bureaucrats at the Greater Wichita Economic development Coalition, the City of Wichita, Sedgwick County, and the State of Kansas were involved. Wichita State University had to be involved. All this to create 5.6 jobs per year for five years.

The jobs are welcome. But this incident and many others like it reveal a capacity problem, which is this: We probably need to be creating 5.6 jobs every working hour of every day in order to make any significant progress in economic growth. If it takes this much effort to create 28 jobs over five years, how much effort will it take to create the many thousands of jobs we need to create every year?

This assumes, of course, that the incentives are necessary to enable the company to expand. City documents stated that the tax exemption is necessary to make the project “viable.” In the article I wrote regarding this item before the council meeting, I wrote that it’s likely that the mayor or city council members will say that if we don’t award the incentives, the company won’t be able to expand. And that’s exactly what was said at the council meeting, except it was by the city’s economic development director.

This only hints at a larger problem. If companies can’t afford to make investments in Wichita unless they receive exemptions from paying taxes, we must conclude that taxes are too high. An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

It’s either that, or this company simply does not want to participate in paying for the cost of government like most other companies and people do. Or — and I hate to mention this possibility — it could be that we’re being lied to. We need to seriously consider the possibility that someone is lying to us. Here’s an example from 2010 that will let you judge the credibility of your local government.

A developer wanted to build a grocery store. He applied for tax Increment financing and a special Community Improvement District tax. During a presentation to the city council the city’s former economic development director explained that to be eligible for TIF, developers must demonstrate a “gap,” that is, an analytical finding that conventional financing is not sufficient for the project, and public assistance is required. And the council members were presented with financial figures that illustrated a gap. Purportedly showed a gap, I should say.

The developer himself told the council that without public assistance, there will be no grocery store: He said: “We have researched every possible way, how do we make this project work with the existing funding that’s available to us. … We might as well say if for some reason we can’t figure out how to get this funding to go through, there won’t be a shopping center over there.”

Then a former city council member who lobbies local government on behalf of clients spoke to the council. He was adamant in his insistence that the grocery store could not be built without public financing: He said “There will not be a building on that corner if this is not passed today. … That new building would not be built. I absolutely can tell you that because we have spent months … trying to figure out a way to finance a project in that area. A grocery store is not going to move into the Planeview area … What you’ve heard is misinformation. … This project just won’t happen and the people of Planeview will suffer.”

So what happened? The city council approved both the TIF and CID incentives. But in Kansas, the overlapping county can veto the formation of a TIF district. The Sedgwick County Commission did that, so tax increment financing was no longer available. So the developer canceled the project.

But then another developer stepped up and built the project without any government assistance. This is the Save-A-Lot grocery store at Pawnee and George Washington Boulevard. The claims that a grocery store could not be built in that neighborhood without economic development incentives were demonstrated to be false. And it was not just the beneficiaries of the incentives that made the claims. It was a top city official. And the city manager, mayor, and council believed it.

Civic leaders say that our economic development policies must be reformed. So far that isn’t happening. Our leaders say that cash incentives are on the way out. This deal did not include grants of cash, that is true. But a discount on taxes is more valuable to business firms than receiving cash. That’s because cash incentives are usually taxable as income, while forgiveness of taxes does not create taxable income. Each dollar of tax that is forgiven adds one dollar to after-tax profits.

The large amount of bureaucratic effort and cost spent to obtain a small number of jobs lets us know that we need to do something else in order to grow our local economy. We need to create a dynamic economy. We need to focus our efforts on creating an environment where growth can occur organically without management by government bureaucrats. Dr. Art Hall’s paper “Embracing Dynamism: The Next Phase in Kansas Economic Development Policy” provides much more information on the need for this, and how to accomplish it.

Another thing we can do to help organically grow our economy and jobs is to reform our local regulatory regime. Recently Kansas Policy Institute released a study of regulation and its impact at the state and local level. You saw James Franko of KPI here on WichitaLiberty.TV talking about its findings and implications.

Creating a dynamic economy and a reformed regulatory regime should cost very little. The benefits would apply to all companies — large or small, startup or established, local or relocations, in any industry.

Our civic leaders say that our economic development efforts must be reformed. Will the path forward be a dynamic economy and reformed regulation? Or will it be more bureaucracy, chasing five jobs at a time? There have been a few changes: a new mayor and a reorganization of our economic development agencies. We have to hope that whatever they decide to do works to bring more jobs and economic growth to Wichita. But I’ve watched these people for a few years, and I’m afraid I have to tell you they do not understood and appreciate the principles of capitalism, property rights, and free markets. They do not embrace economic freedom. Instead, they prefer bureaucracy and cronyism.

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