Does Wichita have a problem with cronyism? The mayor, city council, and bureaucrats say no, but you can decide for yourself. View below, or click here to view in high definition at YouTube.
In February 2012 the City of Wichita held an election, but you wouldn’t have learned of the results if your only news source was the city’s website or television station. In the following article from March 2012, I wonder why news of the election results was overlooked by the city.
After last week’s election results in Wichita in which voters canceled an ordinance passed by the city council, I noticed there was no mention of the election results on the city’s website. So I dashed off a note to several responsible authorities, writing this:
The City of Wichita’s website reports news stories like this, but not the results of a city election held two weeks later.“I notice that the city’s website carries no news on the results of the February 28th election. Is this oversight unintentional? Or does the city intend to continue spending its taxpayer-funded news producing efforts on stories with headlines like ‘Valentine’s at Mid-Continent Airport,’ ‘Rain Garden Workshops in February,’ and ‘Firefighter Receives Puppy Rescued at Fire Scene’?”
It’s not as though city staff doesn’t have time to produce a story on the election. The city’s public affairs department employs 15 people with an annual budget of some $1.3 million. While some of these employees are neighborhood assistants, there are still plenty of people who could spend an hour or two writing a story announcing the results of the February 28th election.
Except: That doesn’t fit in with the city’s political strategy. That strategy appears to be to ignore the results of the election, or to characterize the election as a narrowly-focused referendum on one obscure economic development tool.
At one time, however, the attitude of city hall was that the election was over the entire future of downtown Wichita. Mayor Carl Brewer said the election would cause “turmoil inside the community, unrest.” Council member Pete Meitzner (district 2, east Wichita) said we needed to have an early election date so “avoid community discourse and debate.” He later backpedaled from these remarks.
But now that city hall and its allies lost the election, the issue is now cast as having been very narrow, after all. Citizens aren’t against economic development incentives, they say. They’re just against hotel guest tax rebates.
This narrow interpretation illustrates — again — that we have a city council, city hall bureaucracy, and allied economic development machinery that is totally captured by special interests. Furthermore, the revealed purpose of the city’s public affairs department, including its television channel, is now seen as the promotion of Wichita city government, not Wichita and its citizens. These are two very different things.
In this episode of WichitaLiberty.TV: A few tips on using your computer and the internet. Then, how to be informed. Finally, a look at a recent episode of economic development in Wichita, and what we can we learn from that. Episode 47, broadcast June 15, 2014. View below, or click here to view on YouTube.
Before Wichita city hall asks its subjects for more tax revenue, it needs to regain the trust of Wichitans. Following, from February, an illustration of the problems city hall has created for itself. And, how it would be helpful if the editorial board of the state’s largest newspaper acted as though it cared about ethics, cronyism, government transparency, and corruption.
When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.
— P.J. O’Rourke
Your principle has placed these words above the entrance of the legislative chamber: “whosoever acquires any influence here can obtain his share of legal plunder.” And what has been the result? All classes have flung themselves upon the doors of the chamber crying:
“A share of the plunder for me, for me!”
— Frederic Bastiat
Tomorrow the Wichita City Council considers a policy designed to squelch the council’s ability to issue no-bid contracts for city projects. This policy is necessary to counter the past bad behavior of Wichita Mayor Carl Brewer and several council members, as well as their inability to police themselves regarding matters of ethical behavior by government officials.
The proposed policy is problematic. For some projects the developer will have to pay for “a third party expert to verify construction estimates and contracts with respect to reasonable market costs and appropriate allocation of costs between public and private funding.”
Why are measures like this necessary? The impetus for this policy is the no-bid contract awarded to Key Construction for the construction of the garage near the Ambassador Hotel, originally called Douglas Place, now known as Block One.
A letter of intent passed by the council on August 9, 2011 gives the cost of the garage: “Douglas Place LLC will administer the construction of the garage and urban park on behalf of the City and the City will pay the cost of designing and constructing the same at a cost not-to-exceed $6,800,000.” Of that, $770,000 was for the urban park, leaving about $6 million cost for the garage. The motion to approve the letter of intent passed with all council members except Michael O’Donnell voting in favor.
By the time the item appeared for consideration at the September 13, 2011 city council meeting, city documents gave the cost of the constructing the garage structure at an even $6 million. The motion to spend that amount on the garage passed with all members except O’Donnell voting in favor, except Brewer was absent and did not vote.
Then the city manager decided that the project should be put to competitive bid. Key Construction won that competition with a bid of about $4.7 million. Same garage, same company, but $1.3 million saved.
The Wichita Eagle tells the story like this: “The Ambassador garage at Douglas Place, awarded at $4.73 million to Key Construction — a partner in the hotel project and the project’s contractor — came in about 20 percent under estimates provided the City Council, on the heels of some city-financed downtown parking garages that spiraled over budget.” (“Wichita City Council to consider bidding policy extension”, Wichita Eagle, Sunday, February 2, 2014)
Reading the Eagle story, citizens might conclude that due to excellent management by Key Construction, the garage was built at a 20 percent savings under “estimates.”
But that’s not at all what happened. It’s not even close to what really happened.
Without the intervention of O’Donnell, the city manager, and — according to press reports — city council member Pete Meitzner, the garage would have been built for $6 million. That was the intent of a majority of the council. The $6 million price tag for the no-bid contract was in the ordinance that passed, and in the letter of intent that passed a month before. There were no “estimates” as the Eagle reported. There was only the expressed desire of the council to spend $6 million.
So there were no “estimates” that Key Construction bested. But there was an objectionable no-bid contract that the council agreed to. Fortunately for Wichita, a few people objected and overrode the council’s bad decision.
We’re left to wonder why the Eagle retold the story with Key Construction in the role of hero. That’s about 180 degrees away from the role this company plays.
Key Construction is intimately involved in city politics. Its principals and executives contribute heavily to mayoral and city council election campaigns. Company president David Wells is a personal friend of the mayor.
Did Key’s political involvement and campaign contributions play a role in the council awarding the company a no-bid garage contract? Key Construction executives and their spouses are among a small group who routinely make maximum campaign contributions to candidates. These candidates are both liberal and conservative, which rebuts the presumption that these contributions are made for ideological reasons, that is, agreeing with the political positions of candidates. Instead, Key Construction and a few companies are political entrepreneurs. They seek to please politicians and bureaucrats, and by doing so, receive no-bid contracts and other taxpayer-funded benefits. This form of cronyism is harmful to Wichita taxpayers, as shown by the Ambassador Hotel garage.
The harm of pay-to-play
When it is apparent that a “pay-to-play” environment exists at Wichita City Hall, it creates a toxic and corrosive political and business environment. Companies are reluctant to expand into areas where they don’t have confidence in the integrity of local government. Will I find my company bidding against a company that made bigger campaign contributions than I did? If I don’t make the right campaign contributions, will I get my zoning approved? Will my building permits be slow-walked through the approval process? Will my projects face unwarranted and harsh inspections? Will my bids be subjected to microscopic scrutiny?
Wait a minute: Doesn’t Wichita have a newspaper that keeps a watchful eye on cronyism and corruption? With an editorial board that crusades against these ills?
The answer is no. No such newspaper exists in Wichita.
We need laws to prohibit Wichita city council members from voting on or advocating for decisions that enrich their significant campaign contributors. The Ambassador Hotel garage contract is just one example. Citizens are working on this initiative on several fronts. Some find the actions of these candidates so distasteful and offensive that they are willing to take to the streets to gather thousands of signatures to force the Wichita City Council to act in a proper manner.
That huge effort shouldn’t be necessary. Why? The politicians who accept these campaign contributions say it doesn’t affect their voting, and those who give the contributions say they don’t give to influence votes.
If politicians and contributors really mean what they say, there should be no opposition to such a “pay-to-play” law. Citizens should ask the Wichita City Council to pass a campaign finance reform ordinance that prohibits voting to enrich significant campaign contributors.
There is a law, sort of
Citizens who believe that city council members ought not to vote on matters involving their friends and business associates, we already have such a law. Sort of. Here’s a section from the Wichita city code as passed in 2008 (full section below):
“[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”
Mayor Carl Brewer voted for this law, by the way. When asked about a specific application of this city law, the Wichita city attorney supplied this interpretation:
Related to the Mayor’s participation in the item, yes, City Code advises Council members to “refrain from making decisions involving business associates, customers, clients, friends and competitors. … ” but the Code does not provide definitions or limits to these broad categories of constituents. Further, the City Code clearly requires Council members to “vote on all matters coming before the City Council except in those particular cases of conflict of interest. …” The city Code does not define what constitutes a conflict but the Council has historically applied the State law for that definition.
Applying that State law specific to local municipalities, the Mayor does not have any substantial interest in Douglas Place LLC, and therefore no conflict. Under the State ethics law, there was no requirement that the Mayor recuse himself from voting on the Ambassador Project.
So we have statutory language that reads “shall refrain,” but the city attorney interprets that to mean “advises.”
We also have statutory language that reads “business associates, customers, clients, friends and competitors.” But the city attorney feels that these terms are not defined, and therefore the mayor and city council members need not be concerned about compliance with this law. We’re left to wonder whether this law has any meaning at all.
Be advised: If you ask the mayor to adhere to this law, he may threaten to sue you.
If the city attorney’s interpretation of this law is controlling, I suggest we strike this section from the city code. Someone who reads this — perhaps a business owner considering Wichita for expansion — might conclude that our city has a code of ethics that is observed by the mayor and council members and enforced by its attorneys.
Giving that impression, through, would be false — and unethical.
Here’s the Wichita city code:
Sec. 2.04.050. — Code of ethics for council members.
Council members occupy positions of public trust. All business transactions of such elected officials dealing in any manner with public funds, either directly or indirectly, must be subject to the scrutiny of public opinion both as to the legality and to the propriety of such transactions. In addition to the matters of pecuniary interest, council members shall refrain from making use of special knowledge or information before it is made available to the general public; shall refrain from making decisions involving business associates, customers, clients, friends and competitors; shall refrain from repeated and continued violation of city council rules; shall refrain from appointing immediate family members, business associates, clients or employees to municipal boards and commissions; shall refrain from influencing the employment of municipal employees; shall refrain from requesting the fixing of traffic tickets and all other municipal code citations; shall refrain from seeking the employment of immediate family members in any municipal operation; shall refrain from using their influence as members of the governing body in attempts to secure contracts, zoning or other favorable municipal action for friends, customers, clients, immediate family members or business associates; and shall comply with all lawful actions, directives and orders of duly constituted municipal officials as such may be issued in the normal and lawful discharge of the duties of these municipal officials.
Council members shall conduct themselves so as to bring credit upon the city as a whole and so as to set an example of good ethical conduct for all citizens of the community. Council members shall bear in mind at all times their responsibility to the entire electorate, and shall refrain from actions benefiting special groups at the expense of the city as a whole and shall do everything in their power to ensure equal and impartial law enforcement throughout the city at large without respect to race, creed, color or the economic or the social position of individual citizens.
In this excerpt from WichitaLiberty.TV: The Wichita economy has not performed well. Could cronyism be a contributing factor? Mayor Carl Brewer says it’s time to put politics and special interests aside. Is our political leadership capable of doing this? View below, or click here to view at YouTube.
As the City of Wichita prepares to grant special tax status to another new industrial building, existing landlords must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.
Tomorrow the Wichita City Council considers whether to grant property and sales tax exemptions to a proposed speculative industrial building in north central Wichita. If approved, this will be the second project undertaken under new economic development policies that allow for this type of tax exemption.
City documents estimate that the property tax savings for the first year will be $312,055. This exemption will be granted for five years, with a second five year period possible if performance goals are met.
The city documents also state that the project will also apply for a sales tax exemption, but no estimate of these tax savings are given. It’s common for a project of this type to have about half its cost in purchases subject to sales tax. With “site work and building” at $10,350,000, sales tax in Wichita on half that amount is $370,012. Undoubtedly a rough estimate, it nonetheless gives an idea of how much sales tax the developers will avoid paying.
(If city hall has its way, the sales tax in Wichita will soon increase by one cent per dollar, meaning the developers of this project would save $421,762 in sales tax. While others will hurry to make purchases before the higher sales tax rate takes effect — if it does — these developers will be in no hurry. Their sales tax is locked in at zero percent. In fact, once having a sales tax or property tax exemption, these developers are now in a position to root for higher sales and property tax rates, as that increases costs for their competitors, thereby giving these tax-exempt developers a competitive advantage.)
City documents give the benefit-cost ratios for the city and overlapping jurisdictions:
City of Wichita General Fund 1.30 to one
Sedgwick County 1.18 to one
USD 259 1.00 to one
State of Kansas 12.11 to one
It’s not known whether these ratios include the sales tax forgiveness.
While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.
When the city granted a similar tax exemption to a speculative warehouse in southwest Wichita, my estimates were that its landlord has a cost advantage of about 20 percent over other property owners. Existing industrial landlords in Wichita — especially those with available space to rent and those who may lose tenants to this new building — must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.
Wichita property taxes
Property taxes in Wichita are high for industrial buildings, and even higher for commercial buildings. See Wichita property taxes compared. So it’s difficult to blame developers for seeking relief. But instead of offering tax relief to those who ask and to those city hall approves of, it would be better to have lower taxes for everyone.
Targeted economic development incentives
The targeted economic development efforts of governments like Wichita fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. In the case of the Wichita, do we really know which industries should be targeted? Is 1.3 to one really the benchmark we should seek, or would we be better off by insisting on 1.4 to one? Or should we relax the requirement to 1.2 to one so that more projects might qualify?
This assumes that these benefit-costs ratios have validity. This is far from certain, as follows:
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?
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.
Following, Sedgwick County Commissioner Karl Peterjohn explains something that the county could do to boost economic growth that doesn’t require government intervention, doesn’t need fleets of bureaucrats, reduces cronyism and corruption, increases economic freedom, respects property rights, reduces the power of government to control its subjects, and doesn’t give politicians opportunities to inflate their egos and boost their electoral prospects by being photographed at ground-breaking and ribbon-cutting ceremonies taking credit for spending your money on something you don’t want and which does not work to create jobs and prosperity. For these reasons — especially the latter — this won’t be popular with the political class.
I’ve gathered data from the property tax study that Peterjohn mentions and presented data specific to Wichita at Wichita property taxes compared. A version of this commentary appeared in the Wichtia Eagle.
Let’s create something special and unique
By Karl Peterjohn
This community as well as our country is still in an economic crisis. Our community needs a boost, or a comparative growth advantage. Creating a one (1) cent city sales tax in Wichita won’t create economic growth.
In fact, raising taxes would put our community on the same path trail blazed by many other communities across our country. That is the path to fiscal perdition: Detroit.
This community can create a special and unique comparative advantage by eliminating one of the major disadvantages that this state in general, and Wichita and Sedgwick County face: high property taxes. The high property tax problem for Wichita was once again identified in a national study by the Lincoln Institute on Land Policy and the Minnesota Center for Fiscal Excellence’s, “50 State Property Tax Comparison Study,” issued in March. In this study it identified the fact that Wichita’s property tax on commercial property was 38% above the national average.
High taxes mean less economic growth. This is particularly true for property taxes.
The unique and special approach this community needs is instead of raising the sales tax to expand city spending, the focus should be on eliminating the county’s property tax. Currently the county imposes a 29.3 mill property tax county wide. This mill levy could be eliminated with about a 1.5 cent increase in the sales tax on a revenue neutral basis.
This type of property tax competitiveness would be beneficial on several levels. First, it would provide a unique selling proposition to help attract business to this county and Wichita.
Eliminating the county property tax would provide benefits to all property taxpayers and not just a select few getting special subsidies contained within the city’s sales tax hike plan. Eliminating the county’s property taxes would reduce most county taxpayers’ property tax bills by roughly 25 percent.
Let’s move away from the subsidy model whose odious examples include the failed Solyndra national subsidy boondoggle.
Instead of dangling subsides, which everyone else in the eco-devo game is doing, let’s try a unique incentive: Sedgwick County just eliminated its property tax! We should try this because it can work.
In 1995 Kansas eliminated its state unemployment tax because the fund had developed a large cash balance. This five year tax moratorium created a unique economic advantage for Kansas business. Within a couple of years, the Kansas economy enjoyed a substantial surge in economic growth. Kansas became a leader enjoying some of the fastest economic growth between 1997 to 1999. Eventually, the unemployment fund’s cash balance shrank. By 1999 the unemployment tax was restored. This unique tax advantage was eliminated.
As a county commissioner I am focused on creating a special advantage for everyone in Sedgwick County. Eliminating the county’s property tax is an idea whose time has come.
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.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.
But 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.
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 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.
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. 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.
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.
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.”
This 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.”
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 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.
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. 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).
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.
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.
Tomorrow the Wichita City Council considers a policy designed to squelch the council’s ability to issue no-bid contracts for city projects. This policy is necessary to counter the past bad behavior of Wichita Mayor Carl Brewer and several council members, as well as their inability to police themselves regarding matters of ethical behavior by government officials.
Why are measures like this necessary? The impetus for this policy is the no-bid contract awarded to Key Construction for the construction of the garage near the Ambassador Hotel, originally called Douglas Place, now known as Block One.
Then the city manager decided that the project should be put to competitive bid. Key Construction won that competition with a bid of about $4.7 million. Same garage, same company, but $1.3 million saved.
So there were no “estimates” that Key Construction bested. But there was an objectionable no-bid contract that the council agreed to. Fortunately for Wichita, a few people objected and overrode the council’s bad decision.
Be advised: If you ask the mayor to adhere to this law, he may threaten to sue you.
City documents estimate that the property tax savings for the first year will be $312,055. This exemption will be granted for five years, with a second five year period possible if performance goals are met.
While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.
This community can create a special and unique comparative advantage by eliminating one of the major disadvantages that this state in general, and Wichita and Sedgwick County face: high property taxes. The high property tax problem for Wichita was once again identified in a national study by the Lincoln Institute on Land Policy and the Minnesota Center for Fiscal Excellence’s, “50 State Property Tax Comparison Study,” issued in March. In this study it identified the fact that Wichita’s property tax on commercial property was 38% above the national average.
But 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.
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 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.
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. But by offering to pay a small fraction as PILOT, the company appears magnanimous.
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 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.
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.”
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.)
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.”
Tomorrow the 
So there were no “estimates” that Key Construction bested. But there was an objectionable no-bid contract that the council agreed to. Fortunately for Wichita, a few people objected and overrode the council’s bad decision.
Be advised: If you ask the mayor to adhere to this law, he may 
shall refrain from making decisions involving business associates, customers, clients, friends and competitors; shall refrain from repeated and continued violation of city council rules; shall refrain from appointing immediate family members, business associates, clients or employees to municipal boards and commissions; shall refrain from influencing the employment of municipal employees; shall refrain from requesting the fixing of traffic tickets and all other municipal code citations; shall refrain from seeking the employment of immediate family members in any municipal operation; shall refrain from using their influence as members of the governing body in attempts to secure contracts, zoning or other favorable municipal action for friends, customers, clients, immediate family members or business associates; and shall comply with all lawful actions, directives and orders of duly constituted municipal officials as such may be issued in the normal and lawful discharge of the duties of these municipal officials.
City documents estimate that the property tax savings for the first year will be $312,055. This exemption will be granted for five years, with a second five year period possible if performance goals are met.
But 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.
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 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.
This 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.
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 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.
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.”
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 