Wichita business press needs to step up

If a newspaper is going to write a news story, it might as well take a moment to copy and paste information from a city council agenda packet. Especially when what is missing from the story is perhaps the most important information.

When the Wichita City Council approved an Industrial Revenue Bond issue at its July 10, 2018 meeting, the city’s business press covered the matter. In the Wichita Eagle, the story fails to mention the motivation for the item. 1

The meeting agenda packet for this item, very near its start, states plainly the benefits of the IRBs: “Cargill Incorporated (Cargill) is requesting a Letter of Intent (LOI) for the issuance of Industrial Revenue Bonds (IRBs) in an amount not to exceed $38,000,000 and an 81.5% five-plus-five-year tax abatement and a sales tax exemption for the construction of a new biodiesel facility in north Wichita.” 2

There it is, in plain sight and language: Cargill will save a lot of money in taxes by using these bonds. How much? The same city document details some of the savings:

Based on the current mill levy, the estimated tax value of exempted property for the first full year is $337,904. The value of an 81.5% real property tax exemption (assuming the property is appraised at 80% of the capital investment) as applicable to taxing jurisdictions is:

City $94,109
County $84,677
State $4,321
USD 259 $154,797

The agenda packet doesn’t give an amount for the value of the sales tax exemption, but if all $38,000,000 in bond proceeds was spent on taxable items, sales tax would be $2,850,000. The actual sales tax savings will likely be less than that, but still a lot. (We’ll likely never know, as the Kansas Department of Revenue won’t release the value of sales tax exemptions associated with bond issues.)

Why didn’t the Eagle report this? I don’t know. But the property and sales tax exemptions are the driving motivation behind almost all requests for IRBs. 3

It’s not the case that the company can’t obtain financing on the market. Many IRBs are purchased by the requesting company, as is the case with these bonds, according to the agenda packet: “The bonds will be privately placed with Cargill.”

Instead, Kansas law requires, in most cases, that to issue property and sales tax abatements, IRBs must be used. Again, from the agenda packet: “To insure that all of the real property improvements are receiving the tax abatement, the improvements must be bond financed.” 4

Why can’t the city council simply wave a magic wand and absolve Cargill of paying millions of dollars in property and sales taxes? This is what the city council did, but in a roundabout way.

But because the tax giveaway is mixed with confusing details of bonds, many citizens don’t notice the giveaway. Especially when our city’s leading newspaper does not report this.

Wichita Business Journal reporting was a little better, mentioning the property and sales tax exemptions, but not their monetary value. 5

This article also contains this: “With IRBs, the city serves as a pass-through entity for developers to obtain a lower interest rate on projects. IRBs require no taxpayer commitment.” This is language the newspaper often includes when reporting on IRB issues, and it is simply not true. In this case, a portion of this project qualifies for tax-exempt financing, as it is a solid waste processing facility. 6

But for the remainder of the project, as is the case for most IRB-funded projects, it is not likely the facility will save on interest costs with IRBs. The article is correct in that IRBs require no taxpayer commitment. The city makes no guarantee as to the bond repayment. If the city did guarantee repayment, that would help the borrower obtain a lower interest rate. But there is no guarantee.


Notes

  1. Finger, Stan. Wichita City Council approves bonds for Cargill expansion. Available at https://www.kansas.com/news/business/article214622565.html.
  2. Wichita City Council Agenda packet for July, 10, 2017. Item IV-1.
  3. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  4. As noted below, there is a slight wrinkle in this IRB issue, as some of the financed property is exempt from federal income taxes on interest payments and requires IRBs for that particular property. This is an unusual factor, and does not require that all the plant be financed with IRBs.
  5. Daniel McCoy and Bryan Horwath. City Council approves IRBs for Cargill biodiesel plant. Available at https://www.bizjournals.com/wichita/news/2018/07/10/city-council-approves-irbs-for-cargill-biodiesel.html.
  6. “The solid waste processing component qualifies under Internal Revenue Service (IRS) regulations for tax exempt financing, which can save the company interest expense. Of the total project, approximately $30,000,000 would qualify as a Solid Waste Processing Facility, and therefore, eligible for tax-exempt financing.” Agenda Packet for July 10, 2018.

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