The effort of Wichita and Kansas to retain Hawker Beechcraft, one of our leading employers and a Wichita institution, provides a lesson in the futility of corporate welfare as an economic development policy: Someone is usually willing to pay more. We would be much better off if we start transforming Kansas to a state where all companies are nurtured, not by bureaucratic and political oversight and handouts, but by a low taxing and spending environment, and a reasonable regulatory regime.
Recently I was shown a listing of all the industrial revenue bonds (IRBs) that Hawker Beechcraft and its predecessors have been authorized over the last 20 years. The number is large: $1.2 billion. This is not money that any governmental body has lent to Hawker Beechcraft. The purpose, instead, of the IRB program is to allow companies to escape paying property tax on property purchased with the bond proceeds. In some cases, companies escape paying sales tax as well.
It would be difficult to calculate how much tax Hawker Beechcraft and its predecessors have not paid due to the abatements, but it is a lot. The company still pays some property tax. Records from the Sedgwick County Treasurer’s system indicate the company paid $971,073 in tax year 2009.
When asking for tax breaks like this, companies often point out that they hire many people and pay good wages, so the taxing entities make up their money in other ways. That may be true. In fact, the cost-benefit analysis the city and county use make just that reckoning: if we give up collecting some tax from a company, how much additional tax will we collect from everyone else? Perhaps government officials don’t realize that much of this “benefit” is simply taxes shifted to someone else.
Nonetheless, politicians and bureaucrats call this making an investment in, say, Hawker Beechcraft or whatever company is asking for tax breaks at the moment. The problem is that we don’t know if investing in these companies is the right investment, if government should be making these investments at all.
Somewhere in Wichita or Kansas there a small unknown company that has half a dozen or so employees — maybe more, maybe less — that is working on some innovation. If we’re lucky, we have many such companies. These companies could be working on a new technology, manufacturing process, computer software, video game, internet site, food processing technology, retail concept, chemical process, restaurant idea, engineering methodology, agricultural process, airplane wing — we just don’t know. Many will fail. But some will succeed, and few will, hopefully, succeed in a big way.
But these small startup companies may not fit in to the economic development programs the city and state have. Some people may not even think of looking to government for economic development assistance, as when I interviewed a successful Vietnamese grocer in Wichita. He didn’t know “where to dig” for government handouts.
Any of these now-small companies could become the next Microsoft, Google, Home Depot, or Pizza Hut. We just don’t know which. But these companies, when in small startup stage, struggle to pay the taxes that large companies are able to escape. Being small, they may also be disproportionally impacted by regulation. It’s not necessarily the case that a small startup aviation company is competing directly with Hawker Beechcraft and is handicapped by the larger company’s tax advantages. But these two companies could be competing for the same employees, for example, and that puts the smaller company at a disadvantage.
How can we identify which companies are deserving of government subsidy? Which companies should have their tax burden softened at the expense of others? Allocating resources — deciding what to do — in the face of uncertainty is the crux of entrepreneurship. It’s something that government is not equipped to do, as its incentives and motivations are all wrong.
For politicians, the prime motivation is to be reelected. It is rare that the time horizon of a politician extends beyond the next election.
For bureaucrats, the motivation is to expand their sphere of influence and power.
Neither of these motivations are compatible with entrepreneurship. Some are not compatible in any way with running a business. For example, a business firm looks at its employees as a cost that must be managed and controlled if a profit is to be made and the firm survive. But to government, spending on employees is a social benefit, and one that is paid for by someone else.
Another problem is the nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:
As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.
When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.
I emphasized the last sentence to highlight the problem of the dispersed nature of knowledge.
There are other problems with government management of economic development. We need to move away from this and towards a free market approach to economic development. This will take some time, and until then, we’re forced to defend our industry from other states, as we are presently doing with Hawker Beechcraft.
But if we don’t start transforming Kansas, we’ll be doing this forever. And someone else always seems to have more money to spend.
This is very interesting. Lots of food for thought. Thank you Bob!
Don’t you mean Government-subsidized economic development is not working?
You’ve convinced me. Let’s just make this the state with the most favorable business climate!
Kelsey’s plan sounds good for a start!
As usual an overly simplistic “analysis” to justify a pre-determined ideology. Readers should give appropriate weight accordingly.
Bob, in a huge, dark room a little match can light up the place and your information is that little match that brings to light the abuses of the incentive system. The bigger issue is that of “corporate responsibility”. We continue to think back to the time that our community was consider the “Air Capital of the World”. A time when our aircraft manufacturers were homegrown and corporations were good corporate citizens. Today, our companies are owned by investment bankers and out of state corporations who care more about the next quarter than our workers and community. Granted, these organizations do hire our workers, but at what cost? Those same workers, as taxpayers, contribute to the IRBs, Machinery and Equipment tax credit, Property Tax reductions, etc. Those same CEOs make their money here and then take their millions to live in other communities while we and our children are saddled with the debt of our community’s investments. Perhaps, we should require of any corporation that receives City’s incentives a repayment of a portion or all of the incentives if they are sold, or relocate their facilities. After all, when our companies are sold to out of state corporations those incentives impact the financial bottom line and make our corporations more attractive to outsiders.
Would one of you Wichita people explain to this country boy why a union member would vote to loose their job? Who will now have to pay their unemployment compensation since they are out of work and the company is kaput?
Hi Bman, I think that the union vote is more on the order of calling the Company’s bluff and the state’s too for that matter. They don’t really believe (others don’t either) that Beech will REALLY leave. Boeing has attempted moving jobs to Lake Charles LA, and it didn’t work. Moving the jobs to Mexico is an even worse idea. The workers themselves are cheap, but the graft would be unbelievable.
Wait for Boeing and Spirit’s turn at the trough. Kansas has already given out money to Bombardier (Lear) and Cessna. Fair’s fair and all that.
So they want the taxpayers of Kansas to chip in some bucks to keep them employed in Wichita.
Of course, Wichita is stupid enough to pay Cessna to be their friend, and pay Bombardier to be their friend, why shouldn’t they expect “their fair share”.? They won’t have the B*lls to ask until after the election though.
In 2008 the city and county both provided $5 million to Cessna for their “Columbus” project. When that project, which was supposed to add a large number of jobs like the Learjet announcement, was cancelled the $10 million was returned.
In the last few years, there has been an effort to require some measurement of performance (how many jobs or $ of payroll) were actually added? Did these goals get met on time?
In the age of Obama, everything is political. We have been trending this way since before Jan. 2009. Today, it is much more prevalent. That is why Jonah Goldberg’s recent book on the state of American statism is so relevant and significant. This explains why there is such a massive amount of money “invested” into political campaigns–see today’s eagle for the almost $4 million spent on the 4th district congressional seat by Pompeo/Goyle. This excludes the millions more spent by the primary losers.
In the age of fannie and freddie with govt. ownership in addition to govt. control common in a host of American industries, this is why the Heritage Foundation’s latest survey of economic freedom around the world has dropped the U.S. down into the “mostly free” category. If there was truth in labeling in American politics, the Democrat Party would become the American Socialist Party.
Others might quibble with this name. Perhaps the National Socialist Party would be a more accurate name. American socialism lacks the international flavor of other varieties of this still economically toxic ideology so a nationalist label would easily be viewed as appropriate.
[…] These high business taxes mean that the state and cities must concoct schemes like CIDs and other economic development giveaways in order to attract business to Wichita. This places governmental bodies like the Wichita City Council in the position of selecting which business firms it will invest in, when there’s no way the Council has the knowledge and incentive structure needed to make these decisions. […]
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