Voice For Liberty

Tag: Cronyism

Campaign contribution changes in Wichita
A change to Wichita city election law is likely to have little practical effect.
Currently Wichita city code prohibits certain entities from making campaign contributions to candidates for city council and mayor: “Contributions by political committees as defined by K.S.A. 25-4143, as amended, corporations, partnerships, trusts, labor unions, business groups or other such organizations are expressly prohibited.”
The intent of this law is to limit the influence of businesses and unions on city elections. This week the Wichita City Council will consider striking this portion of city code. The contribution limit of $500 to a candidate for the primary election, and $500 again for the general election, is proposed to be retained.
The practical effect of removing the restriction on campaign contributions from corporations and other entities is likely to be minor. Here’s why.
Last year, lamenting the role of money in national elections, a Wichitan wrote in the Wichita Eagle “Locally, I understand that elections for the Wichita City Council underwent ideal, nonpartisan campaign-finance reform years ago, and that these limits are scrupulously practiced.” This view is naive and doesn’t reflect the reality of current campaign finance practice in Wichita. That is, the stacking of contributions from multiple members of interested groups. For example, a frequent practice is that a business might have several of its executives and their spouses make contributions to a candidate. Because the contributions are made by multiple people, the money is contributed within the campaign finance limitation framework. But the net effect is a lot of money going to a candidate’s campaign in order to advance the interests of the business, thereby circumventing the intent of campaign finance restrictions.
Stacked campaign contributions received by James Clendenin from parties associated with Key Construction. Click for larger version.
Here’s how a handful of self-interested groups stack campaign contributions.
Stacked campaign contributions to Lavonta Williams from Key Construction associates. Click for larger version.
In 2012 council members James Clendenin (district 3, southeast and south Wichita) and Lavonta Williams (district 1, northeast Wichita) were preparing to run again for their offices in spring 2013. Except for $1.57 in unitemized contributions to Clendenin, two groups of related parties accounted for all contributions received by these two incumbents for an entire year. A group associated with Key Construction gave a total of $7,000 — $4,000 to Williams, and $3,000 to Clendenin. Another group of people associated with movie theater owner Bill Warren gave $5,000, all to Clendenin.
Stacked campaign contributions to Jeff Longwell from Key Construction associates. Click for larger version.
In July 2012, as Wichita Mayor Jeff Longwell (then a city council member) was running for the Sedgwick County Commission, his campaign received a series of contributions from a Michigan construction company. Several executives and spouses contributed. At the time, Longwell was preparing to vote in a matter involving a contract that the Michigan company and its Wichita partner wanted. That partner was Key Construction, a company that actively stacks contributions to city council candidates.
Longwell has also received stacked contributions from Key Construction.
The casual observer might not detect the stacking of campaign contributions by looking at campaign finance reports. That’s because for city offices, the name of the company a contributor works for isn’t required. Industry and occupation are required, but these aren’t of much help. Further, contribution reports are not filed electronically, so the information is not easy to analyze. Some reports are even submitted using handwriting, and barely legible handwriting at that.
The campaign finance reform that Wichita really needs is quite simple. It’s called a pay-to-play law, and it can be a simple as this: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”
In other words, you can make contributions to candidates. You can ask the council to give you contracts and other stuff. But you can’t do both. It’s a reform we need, but our elected officials are not interested.
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November 7, 2015
Wichita officials, newspaper, just don’t get it on Ex-Im Bank
Wichita’s establishment prefers cronyism over capitalism.
It’s not surprising that companies that benefit from Export-Import Bank loans support its renewal. We can understand groups like the Wichita Metro Chamber of Commerce campaigning for the bank, as the Chamber is a special interest group that advocates for its members to the detriment of capitalism.
But we ought to expect more from the editorial board of the Wichita Eagle and Wichita city government officials. But the shiny object before them keeps them from seeing the harm of government programs like the Ex-Im Bank.
Ex-Im Bank by the Numbers
- In 2013, 93% of Ex-Im loan guarantees went to just five major corporations.
- From 2009-2013, the bank supported less than two percent of total U.S. exports
- Based on CBO estimates, Ex-Im will cost taxpayers $2 billion over the next ten years
- Between 2007-2014, there were 792 reported claims of fraud and 124 investigations launched into Ex-Im Bank
- From 2010 to 2014, 66 years of prison sentences were handed down to corrupt employees of Ex-Im and its beneficiaries.
Wichita city tweet expressing approval of renewal of Export-Import Bank.
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October 29, 2015
Bombardier can be a learning experience
The unfortunate news of the cancellation of a new aircraft program can be a learning opportunity for Wichita.
As Wichita seeks to grow its economy, the loss of a new aircraft program at one of the city’s major employers is unwelcome news. Now it is important that our leaders and officials seek to learn lessons from this loss. But first, we must acknowledge the loss. Wichita economic development officials are quick to trumpet successes, but so far there is no mention of this loss from the city or its economic development agencies.
The project received state, local and federal incentives. Lots of incentives. These incentives took the form of cash grants, forgiveness of taxes that would otherwise be due, and the ability to reroute its employee withholding taxes for the company’s exclusive benefit. So one lesson is that when local officials complain of the lack of money available for incentives, they are not being truthful.
A second lesson is the limited ability of incentives to overcome obstacles. In this case, the company said the incentives were necessary to make the project economically feasible. Incentives were awarded, but the project failed.
There are some important public policy issues that should be discussed:
Did the incentives induce Bombardier to take risks that it would not have taken had it been investing its own funds, or funds it had to raise from stockholders and debtholders?
Will the politicians that took credit for landing the Model 85 and its jobs now recognize the futility of their efforts?
Will the government agencies that took credit for creating jobs adjust their records?
Incentives like these are often justified using a benefit-cost ratio. This incident reminds us that these calculations are valid only if the investment works as planned. Will local governments recalculate the benefit-cost ratios based on the new information we now have?
Perhaps most important: Who has to pay the costs of these incentives? Part of the cost of this company’s investment, along with 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. This action — the award of incentives to an established company — is harmful to the Wichita economy for its strangling effect on entrepreneurship and young companies. As this company and others receive incentives and escape paying taxes, others have to pay.
There’s plenty of 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, 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. But as we see in the unfortunate news from Bombardier, this is not the case. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)
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October 29, 2015
Wichita Chamber calls for more cronyism
By advocating for revival of the Export-Import Bank of the United States, the Wichita Metro Chamber of Commerce continues its advocacy for more business welfare, more taxes, more wasteful government spending, and more cronyism.
That may be surprising to read. 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 usually not the case. It’s certainly is not the case in Wichita, where the Chamber supports higher taxes,¹ ² more government spending, more business welfare, more government planning and control, more cronyism — and less economic freedom. The predictable result is less prosperity, which has been the case in Wichita under the leadership of the Wichita Chamber, its policies, and the politicians and bureaucrats it supports.
Email to Wichita Chamber of Commerce supporters (excerpt).
Now the Wichita Chamber is asking members to lobby Kansas representatives in support of the revival of the Export-Import Bank. In an email (read here), the Wichita Chamber speaks approvingly of a maneuver executed successfully in the United States House of Representatives that will force a vote on the reauthorization of the Export-Import Bank. The method used, a discharge petition, was signed by well over a majority of House members, including perhaps 42 Republicans. If the petition signers vote the same way, the bill to reauthorize the Ex-Im Bank will pass the House. It will then move to the Senate for consideration.
No members of the House of Representatives from Kansas signed the discharge petition. In July a vote on an amendment in favor of the Ex-Im Bank passed with 67 votes, including votes from both Kansas Senators Pat Roberts and Jerry Moran.
Wichita governmental agencies favor the Export-Import Bank.
Business groups and government agencies usually favor Ex-Im. Business groups — as distinguished from capitalism. Free-market and capitalism advocacy groups are almost universally opposed.
In testimony to Congress on this matter, The Cato Institute providwed this:
The Export-Import Bank’s main functions of providing loan guarantees, insurance, and direct loans that benefit U.S. exporters are typically justified by Ex-Im Bank’s mission of providing that support when there are instances of “market failure” — i.e., when the private market does not provide those services on its own — or subsidized export finance that benefits foreign competitors. I hope to show that in neither instance is the Ex-Im Bank’s support called for.
Proponents of continued funding for the Ex-Im Bank often cite figures of export-related jobs created by Ex-Im’s finance to claim that the agency benefits the U.S. economy. The opportunity costs, or costs to the rest of the economy, of funding Ex-Im Bank’s activities are, however, never cited. By this logic, we are led to believe that the government export program is virtually cost-free or even provides a net economic gain.
The reality is much different, particularly since the market is a far more efficient allocator of resources than government. While it may be true that the export agency helps a few businesses — only about 2 percent of all U.S. goods and services exports are backed by the Ex-Im Bank — it is highly doubtful that the agency helps the U.S. economy. Indeed, as one Congressional Research Service study noted, “Most economists doubt … that a nation can improve its welfare over the long run by subsidizing exports. Internal economic policies ultimately determine the overall level of a nation’s exports… . By providing financing or insurance for exporters, Ex-Im Bank’s activities draw from the financial resources within the economy that would be available for other uses. Such opportunity costs, while impossible to estimate, potentially could be significant.”
Put another way, the Export-Import Bank is an example of corporate welfare. It benefits a small number of private businesses at the expense of other businesses and taxpaying citizens. That is true even if the agency does not lose money. …
Conclusion
The Export-Import Bank is a New Deal era agency with no relevance in a liberal global economy. It has not helped cause U.S. prosperity, but has certainly imposed opportunity costs larger than any alleged benefits; it has not corrected so-called market failures, but has rewarded foreign countries for failing to adopt market-oriented policies and institutions; and it affects such a small percentage of U.S. exports that even in the face of foreign nations’ wrong-headed, export-finance programs, the “playing field” already seems to favor U.S. businesses. The most important reason, however, that the Export-Import Bank’s charter should not be reauthorized is that it is neither morally correct nor constitutional for the federal government to use general taxpayer money to promote the economic welfare of specific groups.
A statement from Americans for Prosperity read:
Members are right to be frustrated with this attempt to sidestep regular order, especially to revive a defunct institution that represents the worst of Beltway crony capitalism. It’s unfortunate that some are determined not to take even a modest step toward restoring free markets or getting out of the business of special interest deals. Signing this discharge petition is an attempt to bring an inherently corrupt institution back from the dead, and it means siding with corporate lobbyists over taxpayers. Abandoning free-market principles is wrong, but trying to do it with a procedural gimmick just adds insult to injury.
FreedomWorks issued this:
This July, an 80-year-old corporate welfare program known as the U.S. Export-Import Bank was allowed to expire for the first time since its inception. Created by FDR as part of his New Deal, the bank offers taxpayer-backed loan guarantees to companies unable to secure independent financing — in other words, loans too risky for private investors to be willing to finance.
It’s a ridiculous and obsolete program, and while its cost is small in the grand scheme of government spending — $2 billion over years — the difficulty with which it was finally defunded shows the extreme disproportionate influence of special interests in Washington. When conservatives finally succeeded in stopping the Bank’s funding, it was regarded as a huge victory for the opponents of corporate cronyism, proof of the concept that we can stop, or at least roll back, the leviathan if we could only muster the political will. …
It’s cynical in the extreme for politicians to try to sneak this corporate handout past the voters, and anyone who supports the reauthorization should be ashamed of themselves. FreedomWorks has preemptively issued a Key Vote NO on any bill to reauthorize the Ex-Im Bank, and will count those votes on our legislative scorecard.
Heritage Foundation has an excellent discussion of the issues at Export–Import Bank: Propaganda versus the Facts.
1. Weeks, B. (2015). Wichita Chamber speaks on county spending and taxes. Voice For Liberty in Wichita. Available at: wichitaliberty.org/sedgwick-county-government/wichita-chamber-speaks-on-county-spending-and-taxes ↩
2. Weeks, B. (2014). For Wichita Chamber of Commerce chair, it’s sales tax for you, but not for me. Voice For Liberty in Wichita. Available at: wichitaliberty.org/wichita-government/wichita-chamber-commerce-chair-sales-tax ↩
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October 25, 2015
Export-Import Bank threatens a revival
Last week members of the United States House of Representatives successfully executed a maneuver that will force a vote on the reauthorization of the Export-Import Bank of the United States. The method used, a discharge petition, was signed by well over a majority of House members, including perhaps 42 Republicans. If the petition signers vote the same way, the bill to reauthorize the Ex-Im Bank will pass the House. It will then move to the Senate for consideration.
No members of the House of Representatives from Kansas signed the discharge petition. In July a vote on an amendment in favor of the Ex-Im Bank passed with 67 votes, including votes from both Kansas Senators Pat Roberts and Jerry Moran.
Wichita governmental agencies favor the Export-Import Bank.
Business groups and government agencies usually favor Ex-Im. Business — as distinguished from capitalism. Free-market and capitalism advocacy groups are almost universally opposed. A statement from Americans for Prosperity read:
Members are right to be frustrated with this attempt to sidestep regular order, especially to revive a defunct institution that represents the worst of Beltway crony capitalism. It’s unfortunate that some are determined not to take even a modest step toward restoring free markets or getting out of the business of special interest deals. Signing this discharge petition is an attempt to bring an inherently corrupt institution back from the dead, and it means siding with corporate lobbyists over taxpayers. Abandoning free-market principles is wrong, but trying to do it with a procedural gimmick just adds insult to injury.
FreedomWorks issued this:
This July, an 80-year-old corporate welfare program known as the U.S. Export-Import Bank was allowed to expire for the first time since its inception. Created by FDR as part of his New Deal, the bank offers taxpayer-backed loan guarantees to companies unable to secure independent financing — in other words, loans too risky for private investors to be willing to finance.
It’s a ridiculous and obsolete program, and while its cost is small in the grand scheme of government spending — $2 billion over years — the difficulty with which it was finally defunded shows the extreme disproportionate influence of special interests in Washington. When conservatives finally succeeded in stopping the Bank’s funding, it was regarded as a huge victory for the opponents of corporate cronyism, proof of the concept that we can stop, or at least roll back, the leviathan if we could only muster the political will. …
It’s cynical in the extreme for politicians to try to sneak this corporate handout past the voters, and anyone who supports the reauthorization should be ashamed of themselves. FreedomWorks has preemptively issued a Key Vote NO on any bill to reauthorize the Ex-Im Bank, and will count those votes on our legislative scorecard.
Heritage Foundation has an excellent discussion of the issues at Export–Import Bank: Propaganda versus the Facts.
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October 12, 2015
Another week in Wichita, more CID sprawl
Shoppers in west Wichita should prepare to pay higher taxes, if the city approves a Community Improvement District at Kellogg and West Streets.
Next week the Wichita City Council will consider the formation of a Community Improvement District (CID) surrounding the intersection of Kellogg and West Streets.
CIDs are a relatively recent creation of the Kansas Legislature. In a CID, merchants may charge additional sales tax, up to an extra two cents per dollar. For more about their mechanism, see Community improvement districts in Kansas. In the present case, the developer proposes to charge an extra one cent per dollar in tax. This extra sales tax, minus a handling fee, will be periodically remitted to the developer. It’s important to note that CID proceeds do not flow to the merchants who collect them.
This CID is “pay-as-you-go,” meaning the city is not issuing bonds or loaning money.
This CID, should the council approve, will contribute to CID sprawl. This is a condition in which more and more of the city is overtaken by CIDs and their higher taxes. In effect, a sales tax increase is taking effect. Because of the city’s weak protection of shoppers from these CID taxes, many Wichitans and visitors will pay higher taxes than they expected. This harms the reputation of Wichita.
(Of note, Kansas raised the statewide sales tax this year. Because Kansas is one of the few states that tax groceries at the full rate, low-income families are harmed most by the higher sales and CID taxes. See Kansas sales tax has disproportionate harmful effects for analysis.)
This CID is likely to be sold to citizens as contributing to public infrastructure. It’s true that a traffic signal on West Street and widening of that street are listed as uses of CID funds. But the amount budgeted is $350,000, which means that the improvements will not be substantial. This inclusion of public infrastructure is likely part of a strategy of sweetening the deal. It’s not all about greedy developers, the city will say. Some of the funds are going to public infrastructure. This strategy was used to justify the Cabela’s CID, in which part of the CID funds are paying for improvements to the intersection of K-96 and Greenwich Road.
This CID proposal contains two new provisions that may help blunt some of the criticism of CIDs as harmful to other business firms in the city. First is this condition: “Allow the City to review and approve or deny the relocation of any business within three miles of the district, for the first three years, on any property in which the developer requests reimbursement for the land acquisition.” This seems designed to restrict “poaching” of merchants from other nearby landlords who are not being subsidized by a CID. Whether this condition has any real meaning is unknown. In practice, the city has been reluctant to enforce restrictions similar to this.
Some of the first buildings to be demolished on West Street, according to a city schedule of milestones. Click for larger.
Also there is this condition: “Demolition or rehabilitation of three identified structures and additional investment within the district within the timeframe below.” Following this is a schedule of milestones. This may be in response to instances where the city has authorized a subsidy program, but nothing happened, or happened slowly. The Exchange Place project at Douglas and Market is one example. Another is the CID at Central and Oliver. Principals of the Kellogg and West CID are also involved in the Central and Oliver CID, and little has happened there since its formation.
Another important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? We can easily see their rationalization: It’s better for us that unwitting customers pay higher sales taxes rather than higher prices. We can blame government for the taxes, but we get the money. ¹
Customers of merchants in CIDS ought to know in advance that an extra tax is charged. Some have recommended warning signage that protects customers from unknowingly shopping in stores, restaurants, and hotels that will be adding extra sales tax to purchases. Developers who want to benefit from CID money say that merchants object to signage, fearing it will drive away customers.
State law is silent on this. The City of Wichita requires a sign indicating that CID financing made the project possible, with no hint that customers will pay additional tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless, but this was the decision the city council made. ²
CIDs allow property owners to establish their own private taxing district for their exclusive benefit. This goes against the grain of the way taxes are usually thought of. Generally, we use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from participating in — benefiting from — police protection.
But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district. We shouldn’t let private parties use a government function for their exclusive benefit.
1. The premise of this question is not accurate, as it is not the merchants who receive CID funds. Landlords do. The more accurate question is why don’t landlords raise their rents? ↩
2. Weeks, B. (2014). Wichita City Council fails to support informing the taxed. Online. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-government/wichita-city-council-fails-support-informing-taxed/ Accessed 31 Aug. 2015. ↩
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September 4, 2015
Wichita CID illustrates pitfalls of government intervention
A proposed special tax district in Wichita holds the potential to harm consumers, the city’s reputation, and the business prospects of competitors. Besides, we shouldn’t let private parties use a government function for their exclusive benefit.
This week the Wichita City Council will consider the formation of a Community Improvement Districts to benefit a proposed hotel in west Wichita.
CIDs are a relatively recent creation of the Kansas Legislature. In a CID, merchants may charge additional sales tax, up to an extra two cents per dollar. For more about their mechanism, see Community improvement districts in Kansas. In the present case, the developer proposes to charge hotel guests an extra two cents per dollar in tax. If retail stores are developed, their customers will pay the CID tax too. This extra sales tax, minus a handling fee, will be periodically remitted to the developer.
From Google Earth, a view of the restaurant and hotel on the subject property. If a house this blighted had been owned by a poor inner-city resident, the city would have long ago condemned and demolished the building, at the homeowner’s expense.
One reason to oppose the formation of this CID is it contributes to Wichita’s reputation as a city of high taxes. The nearby table gives an example of what a hotel bill will look like. There’s the existing guest tax of 6 percent. The city started collecting the 2.75 percent “tourism fee” this year. ¹ (How many cities charge visitors a fee for visiting?) There’s the combined state and county sales tax of 7.5 percent, and then the CID tax of 2 percent. The total of these taxes is 18.25 percent.
A sample hotel bill in Wichita.
The mayor and city council members note that these taxes are paid by people from out of town. They think it’s a smart strategy. But some significant fraction of these taxes are paid by Wichitans, particularly the many companies that have their scattered employees travel to Wichita. And, has anyone ever paid a hotel bill for visiting friends and relatives?
Besides this, do we really want to punish our guests with these taxes? A city tourism fee? Welcome to Wichita, indeed.
Another important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? We can easily see their rationalization: It’s better for us that unwitting customers pay higher sales taxes rather than higher prices. We can blame government for the taxes, but we get the money. ²
There is the competitive effect on other hotels in the area to consider. Some hotel owners feel the ability of one hotel to collect the CID tax for its own benefit gives an unfair competitive advantage.
Customers of merchants in CIDS ought to know in advance that an extra tax is charged. Some have recommended warning signage that protects customers from unknowingly shopping in stores, restaurants, and hotels that will be adding extra sales tax to purchases. Developers who want to benefit from CID money say that merchants object to signage, fearing it will drive away customers.
State law is silent on this. The City of Wichita requires a sign indicating that CID financing made the project possible, with no hint that customers will pay additional tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless, but this was the decision the city council made. ³
CIDs allow property owners to establish their own private taxing district for their exclusive benefit. This goes against the grain of the way taxes are usually thought of. Generally, we use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from participating in — benefiting from — police protection.
But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district. We shouldn’t let private parties use a government function for their exclusive benefit.
1. Weeks, B. (2014). Wichita seeks to add more tax to hotel bills. Online. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-government/wichita-seeks-add-tax-hotel-bills/ Accessed 31 Aug. 2015. ↩
2. The premise of this question is not accurate, as it is not the merchants who receive CID funds. Landlords do. The more accurate question is why don’t landlords raise their rents? ↩
3. Weeks, B. (2014). Wichita City Council fails to support informing the taxed. Online. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-government/wichita-city-council-fails-support-informing-taxed/ Accessed 31 Aug. 2015. ↩
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August 31, 2015
Wichita property tax delinquency problem not solved
Despite a government tax giveaway program, problems with delinquent special assessment taxes in Wichita have become worse.
It’s surprising to read reporting in the Wichita Eagle that the city is owed millions in delinquent special assessment taxes. (City of Wichita owed $4.8 million in delinquent special assessments, August 15, 2015)
That’s because in 2012 the city adopted a program that rebated property taxes to buyers of new homes. The goal of the program was twofold: To help builders sell homes, and to help the city collect delinquent special assessment taxes.
In February of that year, according to city documents, “Current delinquent specials on vacant lots within the City of Wichita are an estimated $3.3 million.”
Now the delinquent taxes have risen to $4.8 million.
This wasn’t supposed to happen. At the council meeting Wes Galyon, president of the Wichita Area Builders Association, told the council, according to meeting minutes: “This program will also aid in eliminating current delinquencies on lots and new home subdivisions in the City and contribute to the developers and builders being able to keep taxes and specials current on buildable lots that they own and plan to build on.”
The city manager told the council, according to meeting minutes: “The other issue was the ability to collect on delinquent taxes and special assessments. Stated that is becoming a growing problem for us as we look at what is happening with the economy and home builders.”
A program that should not have been adopted
In his remarks to city council members in February 2012, Wichita city manager Robert Layton told the council, according to meeting minutes: “Stated they took a businesslike approach as they went through this and designed the program. Stated they consulted Wichita State University and the report references a 1.48 return on our investment just in terms of the present value of the direct and indirect jobs that are created as well as the construction expenditures, which was important to them.”
The manager was referring to an analysis prepared by Wichita State University Center for Economic Development and Business Research, titled Economic Impact of Proposed WABA Incentives, February 1, 2012.
In these analyses, the city attempts to estimate costs and benefits of a program, and adopt only those programs that have a positive ratio of benefits over costs. (Generally the city requires that the ratio be 1.3 to 1 or greater.) Benefits are, according to the study, “sales tax revenues, from construction worker spending and construction material purchases, and property tax revenues.” The costs are the lost revenue due to the tax rebates. Following is an excerpt from a table that presents the results of analysis.
```
                   No Incentives    Incentives
Public Benefits       $2,364,429    $3,004,315
Public Costs                  $0    $2,032,312
Net Public Benefits   $2,364,429      $730,457
Return on Investment      N/A           1.48
```
Some, like the Wichita city manager, focused on the return on investment (ROI) ratio of 1.48 if the tax rebate incentive is used. (There is no such ratio if there are no incentives, as there is no investment.) The study explained the ratio this way: “For every dollar invested, the city will receive the initial dollar plus an additional 48 cents in return.”
That sounds like a good deal, and the ratios like this that are calculated by CEDBR are often used by the city to justify incentives.
But there is another way to look at this deal: the net value to the city. In this case, if the city did not offer the incentives, the benefits to the city would be $2,364,429. If incentives were used, the benefits would be $730,457. This means that if the city does nothing, it is $1,633,972 to the better.
That’s right: Even though the city had an opportunity to make an investment with a purportedly high ROI, it would be better off, dollar-wise, if it did not make the investment.
This illustrates the caveats of working with ratios. They are simply “the relation between two similar magnitudes with respect to the number of times the first contains the second.” A ratio says nothing about the absolute magnitude of the numbers.
For more about the problems CEDBR study found with the program, see Wichita new home tax rebate program: The analysis.
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August 18, 2015
In Sedgwick County, expectation of government entitlements
In Sedgwick County, we see that once companies are accustomed to government entitlements, any reduction is met with resistance.
When an executive of Spirit Aerosystems accused the Sedgwick County Commission of “working against us,” the company may have forgotten the assistance and special treatment the company has received from local governments and taxpayers. This assistance has amounted to hundreds of millions of dollars over several decades, when we consider both Spirit and its predecessor, Boeing.
Now, Spirit objects to a proposed reduction in funding to Wichita Area Technical College, and also cuts to local attractions such as the zoo. The proposed cut to WATC is less than the cut made the year before, although part of that cut was rescinded, making the proposed cut equal to last year’s cut. These cuts follow a trajectory recommended by the former county manager, who was widely praised as understanding and accommodating the needs of area business firms.
So when Spirit accuses county taxpayers as working against the company, it’s a little hard to stomach. Residents of Sedgwick County pay higher taxes so that Spirit can pay less.
Especially glaring is when companies ask for forgiveness of paying sales tax, as Spirit routinely does. In Kansas, low-income families must pay sales tax on their groceries, and at a rate that is among the highest in the country. Even more difficult to fathom are the companies that campaigned for a higher sales tax in Wichita, but engage in financial maneuvers designed to avoid paying any sales tax. Sometimes companies campaign for higher property taxes, especially school bonds, but then ask for exemption from paying those taxes. ¹ ² ³
Following, a discussion of a Spirit Aerosystems tax abatement request from 2014.
This week the Wichita City Council will hold a public hearing concerning the issuance of Industrial Revenue Bonds to Spirit AeroSystems, Inc. The purpose of the bonds is to allow Spirit to avoid paying property taxes on taxable property purchased with bond proceeds for a period of five years. The abatement may then be extended for another five years. Additionally, Spirit will not pay sales taxes on the purchased property.
City documents state that the property tax abatement will be shared among the taxing jurisdictions in these estimated amounts:
City: $81,272
State: $3,750
County: $73,442
USD 259: $143,038
No value is supplied for the amount of sales tax that may be avoided. The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the Spirit properties lie in the Derby school district. This is evident when the benefit-cost ratios are listed:
City of Wichita: 1.98 to one
General Fund: 1.78 to one
Debt Service: 2.34 to one
Sedgwick County: 1.54 to one
U.S.D. 260: 1.00 to one (Derby school district)
State of Kansas: 28.23 to one
The City of Wichita has a policy where economic development incentives should have a benefit cost ratio of 1.3 to one or greater for the city to participate, although there are many loopholes the city regularly uses to approve projects with smaller ratios. Note that the ratio for the Derby school district is 1.00 to one, far below what the city requires for projects it considers for participation. That is, unless it uses one of the many available loopholes.
We have to wonder why the City of Wichita imposes upon the Derby school district an economic development incentive that costs the Derby schools $143,038 per year, with no payoff? Generally the cost of economic development incentives are shouldered because there is the lure of a return, be it real or imaginary. But this is not the case for the Derby school district. This is especially relevant because the school district bears, by far, the largest share of the cost of the tax abatement.
Of note, the Derby school district extends into Wichita, including parts of city council districts 2 and 3. These districts are represented by Pete Meitzner and James Clendenin, respectively.
The city’s past experience
Spirit Aerosystems is a spin-off from Boeing and has benefited from many tax abatements over the years. In a written statement in January 2012 at the time of Boeing’s announcement that it was leaving Wichita, Mayor Carl Brewer wrote “Our disappointment in Boeing’s decision to abandon its 80-year relationship with Wichita and the State of Kansas will not diminish any time soon. 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.”
Along with the mayor’s statement the city released a compilation of the industrial revenue bonds authorized for Boeing starting in 1979. The purpose of the IRBs is to allow Boeing to escape paying property taxes, and in many cases, sales taxes. According to the city’s compilation, Boeing was granted property tax relief totaling $657,992,250 from 1980 to 2017. No estimate for the amount of sales tax exemption is available. I’ve prepared a chart showing the value of property tax abatements in favor of Boeing each year, based on city documents. There were several years where the value of forgiven tax was over $40 million.
Boeing Wichita tax abatements, annual value, from City of Wichita.
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.
Not all the Boeing incentives started with Wichita city government action. But the biggest benefit to Boeing, which is the property tax abatements through industrial revenue bonds, starts with Wichita city council action. By authorizing IRBs, the city council cancels property taxes not only for the city, but also for the county, state, and school district.
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August 6, 2015