Voice For Liberty

Tag: Cronyism

  • Wichita drops taxpayer protection clause

    Wichita drops taxpayer protection clause

    To protect itself against self-defeating appeals of property valuation in tax increment financing districts, the City of Wichita once included a protective clause in developer agreements. But this consideration is not present in two proposed agreements.

    When the Wichita Eagle reported that a downtown developer represented himself as an agent of the city in order to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza, city officials were not pleased.

    The property in question is located in a tax increment financing district. Incremental tax revenue from the property is earmarked for paying off bonds that were issued for the property’s benefit. If tax revenue is reduced from original projections — perhaps because the tax valuation was appealed — the tax revenue might be insufficient to pay the bonds. City taxpayers are then on the hook.

    This is what happened, according to later Eagle reporting: “A special tax district formed by Wichita to assist in the development of the Old Town cinema project can’t cover its debt payments because the developers — including the city itself — petitioned a state court and got their property taxes reduced, records show.”

    This week the Wichita city council considers approving a project plan for part of a TIF district in Old Town, the Mosley Avenue Project. It’s contained within the Old Town Cinema Redevelopment District, a tax increment financing (TIF) district. The developer is Mosley Investments, LLC, a development group comprised of David Burk and Steve Barrett, according to city documents.

    The involvement of Burk and Barrett is problematic. The downtown developer who the Wichita Eagle said represented himself as an agent of the city without the city’s knowledge or consent was David Burk. Barrett was a partner on the project.

    To protect itself when Burk was involved in another TIF-financed project in 2011, the city added language to the developer agreement that prevented appeals of tax valuation, although there was a large loophole included.

    But for the Mosley project, there is no such language prohibiting appeals of tax valuation. For another TIF project plan the city will consider the same day, the Union Station project, there is also no such language.

    A question posed to city hall but not yet answered is this: Is lack of taxpayer protection an oversight, or is it by design?

    More importantly, who in city hall looking out for the interests of taxpayers? Could the generous campaign contributions of Burk and his wife be a factor in this missing taxpayer protection? Or the generous contributions of Key Construction and its executives? (Key Construction is frequently used by Burk.)

    Past action by Burk on property in TIF district

    In February 2010 the Wichita Eagle reported on the activities of Burk with regard to property he owns in Old Town. Citizens reading these articles might have been alarmed at his actions. Certainly some city hall politicians and bureaucrats were.

    The opening sentence of the Wichita Eagle article (Developer appealed taxes on city-owned property) raises the main allegation against Burk: “Downtown Wichita’s leading developer, David Burk, represented himself as an agent of the city — without the city’s knowledge or consent — to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza, according to court records and the city attorney.”

    A number of Wichita city hall officials were not pleased with Burk’s action. According to the Eagle reporting, Burk was not authorized to do what he did: “Officials in the city legal department said that while Burk was within his rights to appeal taxes on another city-supported building in the Cinema Plaza, he did not have authorization to file an appeal on the city-owned parking/retail space he leases. … As for Burk signing documents as the city’s representative, ‘I do have a problem with it,’ said City Attorney Gary Rebenstorf, adding that he intends to investigate further.”

    Council member Jeff Longwell was quoted by the Eagle: “‘We should take issue with that,’ he said. ‘If anyone is going to represent the city they obviously have to have, one, the city’s endorsement and … two, someone at the city should have been more aware of what was going on. And if they were, shame on them for not bringing this to the public’s attention.’”

    Council member Lavonta Williams was not pleased, either: “‘Right now, it doesn’t look good,’ she said. ‘Are we happy about it? Absolutely not.’”

    In a separate article by the Eagle on this issue, we can learn of the reaction by two other city hall officials: “Vice Mayor Jim Skelton said that having city development partners who benefit from tax increment financing appeal for lower property taxes ‘seems like an oxymoron.’ City Manager Robert Layton said that anyone has the right to appeal their taxes, but he added that ‘no doubt that defeats the purpose of the TIF.’”

    The manager’s quote is most directly damaging. In the most common form of a tax increment financing (TIF) district, the city borrows money to pay for things that directly enrich the developers, in this case Burk and his partners. Then their increased property taxes — taxes they have to pay anyway — are used to repay the borrowed funds. In essence, a TIF district allows developers to benefit exclusively from their property taxes. For everyone else, their property taxes go to fund the city, county, school district, state, fire district, etc. But not so for property in a TIF district.

    This is what is most astonishing about Burk’s action: Having been placed in a rarefied position of receiving many millions in benefits, he still thinks his own taxes are too high.

    In response to Burk’s action, the city included a special provision in the agreement for a project in which Burk was involved the next year. This project is the Ambassador Hotel, known at the time as the Douglas Place project. This project is also located within a TIF district and receives the benefit of TIF financing. City documents explained that protests of taxes would not be allowed, but there is a loophole: “In addition, the Developer agrees not to protest the taxes on the building unless the valuation reflects a capitalization rate that exceeds the average rate for boutique hotels as determined by a nationally-recognized hotel appraisal firm.” (Wichita City Council agenda packet, September 13, 2011, page 26.) The agreement and the loophole were expressed in more detail in the agreement on page 138 of the same document.

    At the time, city manager Layton told the Wichita Eagle that taxpayers would be protected in future deals: “We’ve taken several safeguards based on the city’s development experience over the last few years, as well as the advice from Goody Clancy and their business partners based on their experience.” He added “We think we’re set to encourage downtown development in a way that provides protection to the taxpayer.”

    Now this week Dave Burk comes again before the city council asking for TIF money. But there appears to be nothing in the current agreement to protect taxpayers, as there was in the Douglas Place agreement.

    Curiously, Burk is not mentioned by name in the documents prepared for the public hearing on January 6.

  • Government intervention may produce unwanted incentives

    Government intervention may produce unwanted incentives

    A Kansas economic development incentive program has the potential to alter hiring practices for reasons not related to applicants’ job qualifications.

    An economic development incentive program used in Kansas is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees. According to the Kansas Depart of Commerce, “PEAK is intended to encourage economic development in Kansas by incenting companies to relocate, locate or expand business operations and jobs in Kansas. The Secretary of Commerce has discretion to approve applications of qualified companies and determine the benefit period.” Many states have similar programs.

    Flow of tax dollars under normal circumstances, and under PEAK.
    Flow of tax dollars under normal circumstances, and under PEAK.
    PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values.

    There’s the catch. The more tax exemptions a person claims, the lower their taxes, and the lower their payroll withholding. Since PEAK is based directly on the amount of withholding taxes, if less is withheld from employee paychecks, the company receives fewer incentive dollars. In the example above, the single worker generates incentives payments 108 percent greater than does the married worker with two children.

    The question is: Does this provide incentives for companies in the PEAK program to adjust their hiring preferences? Is there an incentive for companies in the PEAK program to hire single workers with no dependents, rather than married workers with children?

    In theory, yes, the incentive exists. Whether it produces an effect in practice is probably impossible to tell. It does illustrate some of the perverse incentives that can arise from government intervention in the economy.

    If government simply paid cash to companies in a fixed amount per worker, the bias in favor of single workers would not exist. But if government paid cash directly to companies, many people would object. When accomplished through the tax system, however, the transactions are less obvious, but the benefits and costs are just as real.

    Either way, cronyism exists, especially because the Secretary of Commerce has discretion in the approval of applications to participate in PEAK.

  • Tax increment financing (TIF) resources

    Tax increment financing (TIF) resources

    Resources on tax increment financing (TIF) districts.

    Tax Increment Financing: A Tool for Local Economic Development. Richard F. Dye and David F. Merriman. Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

    Wichita TIF projects: some background. Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.

    The effects of tax increment financing on economic development. Richard F. Dye and David F. Merriman. Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) sequesters property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. We have constructed an extensive data set for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption. In contrast to the conventional wisdom, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding. We argue that our empirical finding is plausible and present a theoretical argument explaining why TIF might reduce municipal growth.

    Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data. T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:

    “This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)

    In the paper, the author clarifies:

    “To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF dis-tricts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.

    Later on, for emphasis:

    “While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)

    The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”

    The Most Popular Tool: Tax Increment Financing and the Political Economy of Local Government. Richard Briffault, University of Chicago Law Review, Winter 2010. “Tax increment financing (TIF) is the most widely used local government program for financing economic development in the United States, but the proliferation of TIF is puzzling. TIF was originally created to support urban renewal programs and was narrowly focused on addressing urban blight, yet now it is used in areas that are plainly unblighted. TIF brings in no outside money and provides no new revenue-raising authority. There is little clear evidence that TIF has done much to help the municipalities that use it, and it is also a source of intergovernmental tension and a site of conflict over the scope of public aid to the private sector.

    Yet, the expansion of TIF makes sense in light of the basic structure of American local government law. Studying TIF can illuminate central features of our local government system. TIF succeeds — in the sense of its widespread adoption and use — because it, like local government more generally, is highly decentralized; reflects and reinforces the fiscalization of development policy; plays off the fragmentation of local governments and the resulting interlocal struggle for investment; and fits well with the entrepreneurial spirit characteristic of contemporary local economic development policy. A better understanding of TIF contributes to a better understanding of the political economy of American local government.”

    Wichita should reject Bowllagio TIF district. Wichita should reject the formation of a harmful tax increment financing (TIF) district.

    Wichita TIF: Taxpayer-funded benefits to political players. It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

    Tax increment financing (TIF) and economic growth. There is clear and consistent evidence that municipalities that adopt tax increment financing, or TIF, grow more slowly after adoption than those that do not.

    Does tax increment financing (TIF) deliver on its promise of jobs? When looking at the entire picture, the effect on employment of tax increment financing, or TIF districts, used for retail development is negative.

    Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing. Randal O’Toole, Cato Institute. While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them. Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

    TIF is not Free Money. Randal O’Toole. Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners. … Legislators should recognize that TIF no longer has a reason to exist, and it didn’t even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.

    Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. Paul F. Byrne. Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.

    Tax Increment Financing and Missouri: An Overview Of How TIF Impacts Local Jurisdictions. Paul F. Byrne. Tax Increment Financing (TIF) has become a common economic development tool throughout the United States. TIF takes the new taxes that a development generates and directs a portion of them to repay the costs of the project itself. … Supporters of TIF argue that it is a necessary tool for redevelopment in older communities. Detractors contend that it is used to simply subsidize development, and that variances in tax systems allow some governments to implement and benefit from TIF even if its use harms other levels of government. This study provides an overview of the history and basic structure of TIF. It then analyzes the basic tax components of a TIF plan and compares how various aspects, such as tax capture and tax competition, play out in the standard system of TIF. The study then reviews the economic literature on TIF, and ends with a direct application of how TIF operates within Missouri.

    The Right Tool for the Job? An analysis of Tax Increment Financing. Heartland Institute. Tax Increment Financing (TIF) is an economic development tool that uses the expected growth (or increment) in property tax revenues from a designated geographic area of a municipality to finance bonds used to pay for goods and services calculated to spur growth in the TIF district. The analysis performed for this study found TIF does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness. We recommend seeking alternatives to TIF and reforms to TIF that make the process more democratic and the distribution of benefits more fair to residents of TIF districts.

    Giving Away the Store to Get a Store. Daniel McGraw, Reason. Largely because it promises something for nothing — an economic stimulus in exchange for tax revenue that otherwise would not materialize — this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela’s can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises. … At a time when local governments’ efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don’t want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

    Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth? David Swenson and Liesl Eathington. We found virtually no statistically meaningful economic, fiscal, and social correlates with this practice in our assessment; consequently, the evidence that we analyzed suggests that net positions are not being enhanced — that the overall expected benefits do not exceed the public’s costs.

    No More Secret Candy Store: A Grassroots Guide to Investigating Development Subsidies. From Good Jobs First, a comprehensive guide to researching state and local subsidies, economic development agencies, and companies.

  • Wichita TIF projects: some background

    Wichita TIF projects: some background

    Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.

    The consideration this week by the Wichita City Council of two project plans in tax increment financing districts offers an opportunity to examine the issues surrounding TIF.

    How TIF works

    A TIF district is a geographically-defined area.

    In Kansas, TIF takes two or more steps. The first step is that cities or counties establish the boundaries of the TIF district. After the TIF district is defined, cities then must approve one or more project plans that authorize the spending of TIF funds in specific ways. (The project plan is also called a redevelopment plan.) In Kansas, overlapping counties and school districts have an opportunity to veto the formation of the TIF district, but this rarely happens. Once the district is formed, cities and counties have no ability to object to TIF project plans.

    Figure 1.
    Figure 1.
    Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”

    Figure 2.
    Figure 2.
    After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)

    Figure 3.
    Figure 3.
    Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations (mostly): The State of Kansas, and repayment of the TIF bonds.

    Figure 4.
    Figure 4.
    Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.

    (Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)

    The Kansas law governing TIF, or redevelopment districts as they are also called, starts at K.S.A. 12-1770.

    TIF and public policy

    Originally most states included a “but for” test that TIF districts must meet. That is, the proposed development could not happen but for the benefits of TIF. Many states have dropped this requirement. At any rate, developers can always present proposals that show financial necessity for subsidy, and gullible government officials will believe.

    Similarly, TIF was originally promoted as a way to cure blight. But cities are so creative and expansive in their interpretation of blight that this requirement, if it still exists, has little meaning.

    The rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. 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 benefiting from police protection.

    So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)

    But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.

    One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.

    It’s only infrastructure

    In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.

    This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”

    This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:

    Figure 5. Waterfront resolutions.
    Figure 5. Waterfront resolutions.
    Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)

    In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.

    If not for TIF, nothing will happen here

    Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:

    “The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”

    It’s often thought that when a but-for justification is required in order to receive an economic development incentive, financial figures can be produced that show such need. Now, recent research shows that the but-for justification is problematic. In Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data, author T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:

    “This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)

    In the paper, the author clarifies:

    “To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF districts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.

    Later on, for emphasis:

    “While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)

    The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”

    The paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”

    TIF is social engineering

    TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?

    TIF doesn’t work

    Does TIF work? It depends on what the meaning of “work” is.

    If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.

    Does TIF pay for itself?
    First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.

    The verge of corruption
    Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:

    “TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”

    We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.

    The effect of TIF on everyone
    Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.

    An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:

    “TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.”

    So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:

    “If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.

    We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.” (emphasis added)

    In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” (emphasis added)

    The Wichita city council is concerned about creating jobs, and is easily swayed by the promises of developers that their establishments will create jobs. Paul F. Byrne of Washburn University has examined the effect of TIF on jobs. His recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:

    “This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.” (emphasis added)

    These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.

  • Wichitaliberty.TV: Special taxes for artists

    In this excerpt from WichitaLiberty.TV: Wichita government spending on economic development leads to imagined problems that require government intervention and more taxpayer contribution to resolve. The cycle of organic rebirth of cities is then replaced with bureaucratic management. Originally broadcast December 7, 2014. View below, or click here to view at YouTube.

    For more on thiss issue, see City of Wichita State Legislative Agenda: Cultural Arts Districts.

  • Year in Review: 2014

    Year in Review: 2014

    Here is a sampling of stories from Voice for Liberty in 2014.

    January

    A transparency agenda for Wichita
    Kansas has a weak open records law, and Wichita doesn’t want to follow the law, as weak as it is. But with a simple change of attitude towards open government and citizens’ right to know, Wichita could live up to the goals its leaders have set.

    New York Times on Kansas schools, again
    The New York Times — again — intervenes in Kansas schools. As it did last October, the newspaper makes serious errors in its facts and recommendations.

    Visit Wichita, and pay a tourism fee
    The Wichita City Council will consider adding a 2.75 percent tax to hotel bills, calling it a “City Tourism Fee.” Welcome to Wichita!

    Wichita’s growth in gross domestic product
    Compared to peer areas, Wichita’s record of growth in gross domestic product is similar to that of job creation: Wichita performs poorly.

    The death penalty in Kansas, a conservative view
    What should the attitude of conservatives be regarding the death penalty? Ben Jones of Conservatives Concerned about the Death Penalty spoke on the topic “Capital Punishment in Kansas from a conservative perspective: Is it a failed policy?”

    Kansas school test scores, the subgroups
    To understand Kansas school test scores, look at subgroups. Sometimes Kansas ranks very well among the states. In other instances, Kansas ranks much lower, even below the national average. It’s important for Kansans — be they citizens, schoolchildren, parents, education professionals, or (especially) politicians of any party — to understand these scores.

    The state of Wichita, 2014
    Wichita Mayor Carl Brewer delivered the annual State of the City address. He said a few things that deserve discussion.

    February

    In Wichita, why do some pay taxes, and others don’t?
    A request by a luxury development in downtown Wichita raises issues, for example, why do we have to pay taxes?

    Wichita considers policy to rein in council’s bad behavior
    he 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.

    Our Kansas grassroots teachers union
    Letters to the editor in your hometown newspaper may have the air of being written by a concerned parent of Kansas schoolchildren, but they might not be what they seem.

    Wichita’s legislative agenda favors government, not citizens
    This week the Wichita City Council will consider its legislative agenda. This document contains many items that are contrary to economic freedom, capitalism, limited government, and individual liberty. Yet, Wichitans pay taxes to have someone in Topeka promote this agenda.

    Wichita planning documents hold sobering numbers
    The documents hold information that ought to make Wichitans think, and think hard. The amounts of money involved are large, and portions represent deferred maintenance. That is, the city has not been taking care of the assets that taxpayers have paid for.

    In Wichita, citizens want more transparency in city government
    In a videographed meeting that is part of a comprehensive planning process, Wichitans openly question the process, repeatedly asking for an end to cronyism and secrecy at city hall.

    March

    Special interests struggle to keep special tax treatment
    When a legislature is willing to grant special tax treatment, it sets up a battle to keep — or obtain — that status. Once a special class acquires preferential treatment, others will seek it too.

    In Wichita, West Bank apartments seem to violate ordinance
    Last year the Wichita City Council selected a development team to build apartments on the West Bank of the Arkansas River, between Douglas Avenue and Second Street. But city leaders may have overlooked a Wichita City Charter Ordinance that sets aside this land to be “open space, committed to use for the purpose of public recreation and enjoyment.”

    In Wichita, pushing back at union protests
    A Wichita automobile dealer is pushing back at a labor union that’s accusing the dealer of unfair labor practices.

    Wichita City Council to consider entrenching power of special interest groups
    The Wichita City Council will consider a resolution in support of the status quo for city elections. Which is to say, the council will likely express its support for special interest groups whose goals are in conflict with the wellbeing of the public.

    State employment visualizations
    There’s been dueling claims and controversy over employment figures in Kansas and our state’s performance relative to others. I present the actual data in interactive visualizations that you can use to make up your own mind.

    State and local government employment levels vary
    The states vary widely in levels of state government and local government employees, calculated on a per-person basis. Only ten states have total government employee payroll costs greater than Kansas, on a per-person basis.

    April

    Wichita not good for small business
    When it comes to having good conditions to support small businesses, well, Wichita isn’t exactly at the top of the list, according to a new ranking from The Business Journals.

    Cronyism is welfare for rich and powerful, writes Charles G. Koch
    “The central belief and fatal conceit of the current administration is that you are incapable of running your own life, but those in power are capable of running it for you. This is the essence of big government and collectivism,” writes Charles G. Koch in the Wall Street Journal.

    Rich States, Poor States for 2014 released
    In the 2014 edition of Rich States, Poor States, Utah continues its streak at the top of Economic Outlook Ranking, meaning that the state is poised for growth and prosperity. Kansas continues with middle-of-the-pack performance rankings, and fell in the forward-looking forecast.

    Wichita develops plans to make up for past planning mistakes
    On several issues, including street maintenance, water supply, and economic development, Wichita government and civic leaders have let our city fall behind. Now they ask for your support for future plans to correct these mistakes in past plans.

    May

    Poll: Wichitans don’t want sales tax increase
    According to a newly released poll from Kansas Policy Institute, Wichitans may want more jobs and a secure water source but they certainly don’t support a sales tax increase as the means to get either. Reporting on this poll is available in these articles: In Wichita, opinion of city spending consistent across party and ideology, Few Wichitans support taxation for economic development subsidies, Wichitans willing to fund basics, and To fund government, Wichitans prefer alternatives to raising taxes.

    Contrary to officials, Wichita has many incentive programs
    Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available.

    In Wichita, the streetside seating is illuminated very well
    Wichita city leaders tell us that the budget and spending have been cut to the bone. Except for the waste, that is.

    Wichita seeks to form entertainment district
    A proposed entertainment district in Old Town Wichita benefits a concentrated area but spreads costs across everyone while creating potential for abuse.

    In Wichita, capitalism doesn’t work, until it works
    Attitudes of Wichita government leaders towards capitalism reveal a lack of understanding. Is only a government-owned hotel able to make capital improvements?

    Wichita, again, fails at government transparency
    At a time when Wichita city hall needs to cultivate the trust of citizens, another incident illustrates the entrenched attitude of the city towards its citizens. Despite the proclamations of the mayor and manager, the city needs a change of attitude towards government transparency and citizens’ right to know.

    Wichita per capita income not moving in a good direction
    Despite its problematic nature, per capita income in Wichita is used as a benchmark for the economy. It’s not moving in the right direction. As Wichita plans its future, leaders need to recognize and understand its recent history.

    Uber, not for Wichita
    A novel transportation service worked well for me on a recent trip to Washington, but Wichita doesn’t seem ready to embrace such innovation.

    For Kansas’ Roberts, an election year conversion?
    A group of like-minded Republican senators has apparently lost a member. Is the conservative voting streak by Pat Roberts an election year conversion, or just a passing fad?

    June

    Wichita property taxes compared
    An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

    Government employee costs in the states
    The states vary widely in levels of state government and local government employees and payroll costs, calculated on a per-person basis. Kansas ranks high in these costs, nationally and among nearby states.

    With new tax exemptions, what is the message Wichita sends to existing landlords?
    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.

    Wichita city council schools citizens on civic involvement
    Proceedings of a recent Wichita City Council meeting are instructive of the factors citizens should consider if they want to interact with the council and city government at a public hearing.

    Forget the vampires. Let’s tackle the real monsters.
    Public service announcements on Facebook and Wichita City Channel 7 urge Wichitans to take steps to stop “vampire” power waste. But before hectoring people to introduce inconvenience to their lives in order to save small amounts of electricity, the city should tackle the real monsters of its own creation.

    July

    Wichita property taxes rise again
    The City of Wichita is fond of saying that it hasn’t raised its mill levy in many years. But the mill levy has risen in recent years.

    For Wichita leaders, novel alternatives on water not welcome
    A forum on water issues featured a presentation by Wichita city officials and was attended by other city officials, but the city missed a learning opportunity.

    For Wichita’s new water supply, debt is suddenly bad
    Wichita city leaders are telling us we need to spend a lot of money for a new water source. For some reason, debt has now become a dirty word.

    Pat Roberts, senator for corporate welfare
    Two years ago United States Senator Pat Roberts voted in committee with liberals like John Kerry, Chuck Schumer, and Debbie Stabenow to pass a bill loaded with wasteful corporate welfare.

    August

    Charles Koch: How to really turn the economy around
    Writing in USA Today, Charles Koch offers insight into why our economy is sluggish, and how to make a positive change.

    Wichita airport statistics updated
    As the Wichita City Council prepares to authorize funding for Southwest Airlines, it’s worth taking a look at updated statistics regarding the airport.

    Wichita sales tax hike would hit low income families hardest
    Analysis of household expenditure data shows that a proposed sales tax in Wichita affects low income families in greatest proportion, confirming the regressive nature of sales taxes.

    Welcome back, Gidget
    Gidget stepped away for a few months, but happily she is back writing about Kansas politics at Kansas GOP Insider (wannabe).

    September

    Wichita planning results in delay, waste
    Wichita plans an ambitious road project that turns out to be too expensive, resulting in continued delays for Wichita drivers and purchases of land that may not be needed.

    ‘Transforming Wichita’ a reminder of the value of government promises
    When Wichita voters weigh the plausibility of the city’s plans for spending proposed new sales tax revenue, they should remember this is not the first time the city has promised results and accountability.

    Fact-checking Yes Wichita: NetApp incentives
    In making the case that economic development incentives are necessary and successful in creating jobs, a Wichita campaign overlooks the really big picture.

    Arrival of Uber a pivotal moment for Wichita
    Now that Uber has started service in Wichita, the city faces a decision. Will Wichita move into the future by embracing Uber, or remain stuck in the past?

    Fact-checking Yes Wichita: Boeing incentives
    The claim that the “city never gave Boeing incentives” will come as news to the Wichita city officials who dished out over $600 million in subsidies and incentives to the company.

    Beechcraft incentives a teachable moment for Wichita
    The case of Beechcraft and economic development incentives holds several lessons as Wichita considers a new tax with a portion devoted to incentives.

    For Kansas budget, balance is attainable
    A policy brief from a Kansas think tank illustrates that balancing the Kansas budget while maintaining services and lower tax rates is not only possible, but realistic.

    To Wichita, a promise to wisely invest if sales tax passes
    Claims of a reformed economic development process if Wichita voters approve a sales tax must be evaluated in light of past practice and the sameness of the people in charge. If these leaders are truly interested in reforming Wichita’s economic development machinery and processes, they could have started years ago using the generous incentives we already have.

    For Wichita Chamber’s expert, no negatives to economic development incentives
    An expert in economic development sponsored by the Wichita Metro Chamber of Commerce tells Wichita there are no studies showing that incentives don’t work.

    Water, economic development discussed in Wichita
    Dr. Art Hall, Executive Director of the Center for Applied Economics at the University of Kansas School of Business, presented his “Thoughts on Water and Economic Development” at the Wichita Pachyderm Club Friday, September 19, 2014

    Stuck in the box in Wichita, part one
    To pay for a new water supply, Wichita gives voters two choices and portrays one as bad. But the purportedly bad choice is the same choice the city made over the last decade to pay for the last big water project. We need out-of-the-box thinking here.

    October

    Kansas economy has been underperforming
    Those who call for a return to the economic policies of past Kansas gubernatorial administrations may not be aware of the performance of the Kansas economy during those times.

    Union Station TIF provides lessons for Wichita voters
    A proposed downtown Wichita development deserves more scrutiny than it has received, as it provides a window into the city’s economic development practice that voters should peek through as they consider voting for the Wichita sales tax.

    A simple step towards government transparency in Wichita
    Kansas law requires publication of certain notices in newspapers, but cities like Wichita could also make them available in other ways that are easier to use.

    While Wichita asks for new taxes, it continues to spend and borrow
    The City of Wichita says it doesn’t have enough revenue for things like street maintenance and transit, but continues to borrow for spending on new projects.

    Wichita debt levels seen to rise
    As part of the campaign for a proposed Wichita sales tax, the city says that debt is bad. But actions the city has taken have caused debt levels to rise, and projections are for further increases.

    For Wichita, another economic development plan
    The Wichita City Council will consider a proposal from a consultant to “facilitate a community conversation for the creation of a new economic development diversification plan for the greater Wichita region.” Haven’t we been down this road before?

    In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters
    While “Yes Wichita” campaigns for higher sales taxes, it operates from a building that received a special exemption from paying sales tax.

    For Wichita Chamber of Commerce chair, it’s sales tax for you, but not for me
    A Wichita company CEO applied for a sales tax exemption. Now as chair of the Wichita Metro Chamber of Commerce, he wants you to pay more sales tax, even on the food you buy in grocery stores.

    Should Wichita expand a water system that is still in commissioning stage?
    Should we be concerned about rushing a decision to expand a water production system that has not yet proven itself?

    Wichita sends educational mailer to non-Wichitans, using Wichita taxes
    Why is the City of Wichita spending taxpayer money mailing to voters who don’t live in the city and can’t vote on the issue?

    Wichita to consider tax exemptions
    A Wichita company asks for property and sales tax exemptions on the same day Wichita voters decide whether to increase the sales tax, including the tax on groceries.

    November

    In election coverage, The Wichita Eagle has fallen short
    Citizens want to trust their hometown newspaper as a reliable source of information. The Wichita Eagle has not only fallen short of this goal, it seems to have abandoned it.

    Kansas school spending visualization updated
    There’s new data available from Kansas State Department of Education on school spending. I’ve gathered the data, adjusted it for the consumer price index, and now present it in this interactive visualization.

    In Kansas, school employment rises again
    For the fourth consecutive year, the number of teachers in Kansas public schools has risen faster than enrollment, leading to declining pupil-teacher ratios.

    Richard Ranzau, slayer of cronyism
    In Sedgwick County, an unlikely hero emerges in the battle for capitalism over cronyism.

    Kansans still uninformed on school spending
    As in the past, a survey finds Kansans are uninformed or misinformed on the level of school spending, and also on the direction of its change.

    In Kansas, voters want government to concentrate on efficiency and core services before asking for taxes
    A survey of Kansas voters finds that Kansas believe government is not operating efficiently. They also believe government should pursue efficiency savings, focus on core functions, and spend unnecessary cash reserves before cutting services or raising taxes.

    Kansas cities should not unilaterally grant tax breaks
    When Kansas cities grant economic development incentives, they may also unilaterally take action that affects overlapping jurisdictions such as counties, school districts, and the state itself. The legislature should end this.

    City of Wichita State Legislative Agenda: Cultural Arts Districts
    Wichita government spending on economic development leads to imagined problems that require government intervention and more taxpayer contribution to resolve. The cycle of organic rebirth of cities is then replaced with bureaucratic management.

    December

    City of Wichita State Legislative Agenda: Airfares
    The City of Wichita’s legislative agenda regarding the Affordable Airfares subsidy program seems to be based on data not supported by facts.

    Options for funding Wichita’s future water supply
    Now that the proposed Wichita sales tax has failed, how should Wichita pay for a future water supply?

    KU records request seen as political attack
    A request for correspondence belonging to a Kansas University faculty member is a blatant attempt to squelch academic freedom and free speech.

    Why is this man smiling?
    In Wichita, the chair of the Wichita Metro Chamber of Commerce crafts a sweetheart deal for his company to the detriment of Wichita taxpayers.

    Wichita Metro Chamber of Commerce: What is the attitude towards taxes?
    Does the Wichita Metro Chamber of Commerce support free markets, capitalism, and economic freedom, or something else?

    Will the next Wichita mayor advocate enforcing our ethics laws?
    Wichita has laws that seem clear. But the city attorney said they don’t mean what they seem to say. Will our next mayor stand up for ethics?

    Campaign contribution stacking in Wichita
    Those seeking favors from Wichita City Hall use campaign contribution stacking to bypass contribution limits. This has paid off handsomely for them, and has harmed everyone else.

    Economic development in Wichita: Looking beyond the immediate
    Decisions on economic development initiatives in Wichita are made based on “stage one” thinking, failing to look beyond what is immediate and obvious.

    Economic development in Sedgwick County
    The issue of awarding an economic development incentive reveals much as to why the Wichita-area economy has not grown.

  • Economic development in Sedgwick County

    Economic development in Sedgwick County

    The issue of awarding an economic development incentive reveals much as to why the Wichita-area economy has not grown.

    At the December 17, 2014 meeting of the Sedgwick County Commission an economic development incentive was considered. The proceedings are of interest as a window into how economic development works.

    The proposal was that Sedgwick County will make a loan to Figeac Aero in the amount of $250,000 as an economic development incentive in conjunction with its acquisition of a local company and a contemplated expansion. It’s likely the county will also participate in forgiving property taxes, although that decision will be made by the City of Wichita on the county’s behalf.

    Sedgwick County Chief Financial Officer Chris Chronis presented the item to the commissioners, telling them “the company has been very successful in Europe.”

    Chronis also presented the benefit-cost analysis from calculated by the Center for Economic Development and Business Research (CEDBR) at Wichita State University. He said the proposed county property tax abatement has a value of just over $473,000, although the award of the exemption is controlled by the city. The present value of county’s cost over ten years, considering both the property tax abatement and the $250,000 loan, is $687,793. The present value of the benefit is just over $1,000,000, so the county’s net benefit is $317,834. Therefore, the net public financial benefit ratio to the county of 1.46 to one.

    The final review of the contract is still to be performed. Chronis asked the commission for authorizing him to execute an agreement “in substantially the same form as the one we have given you, subject to final review by the county counselor.”

    Commissioner Richard Ranzau asked if the commission had in its possession the final form of the document. The answer was no. Chronis said that the document is substantially in final form, subject to some tweaking. Later questioning by Ranzau revealed that there are many parts of the contract that are not present. The agreement the commissioners had referenced the missing parts, such as a security agreement.

    Ranzau also brought up the fact that the commission had changed its policy so that forgivable loans are no longer used. Chronis said this is not a forgivable loan. Ranzau asked “what is it?” Chronis replied it is a loan. Ranzau asked if the company had to repay the loan. Chronis said if they don’t fulfill their end of the agreement, then yes, they will have to pay it back. If the company does not repay the loan, this is because the company has met the employment targets, and the county gets its repayment in the form of economic benefit to the community and to Sedgwick County government, he added.

    In the end, Chronis admitted that this agreement has the same elements of past forgivable loans, but is different because now there is better protection in case the company does not satisfy commitments.

    In support of the incentive, Wichita Metro Chamber of Commerce president Gary Plummer said he is here in a “positive environment.” He told the commissioners that staff worked very hard. He mentioned how much tax the company has paid to Sedgwick County. He said this is a great moment in Sedgwick County economic development history.

    Greater Wichita Economic Development Coalition Chair Gary Schmitt appeared to mention the return to the county in the form of tax revenue.

    Greater Wichita Economic Development Coalition president Tim Chase promoted the security that the county is receiving in case the loan needs to be repaid. There is a lien on tangible assets, for example. But the company still must agree to specific provisions for the security of the loan. Chase said this is “not, in any way, shape, or form a done deal.”

    French air parts maker Figeac has plans to grow in WichitaCommissioner Karl Peterjohn mentioned a newspaper article from May that quoted Figeac Aero’s vice president of business development as saying “the heart of Figeac North America will be Wichita.” Chase explained there had been personnel changes since then. Also, Chase said that Figeac hired a consultant that advised the company to inquire about “standard” incentives. When GWEDC did not supply an answer the company considered satisfactory, Chase said he was told “that starts the clock over. We’re going to begin looking at other locations.” The article Peterjohn referred to is French air parts maker Figeac has plans to grow in Wichita May 9, 2014 Wichita Eagle.

    There was a question about state participation in incentives. Chronis did not know what, if anything, the state would be offering.

    In further discussion, Ranzau said that Figeac has already bought a company here and is hiring. They have plans to be here, he said, meaning that the “but for” argument does not apply. By his calculation, if the average salary was reduced by 12 cents per hour, that would amount to the value of the incentive Sedgwick County is offering, $250,000 over five years. He expressed his concern that the contract the commission is being asked to approve is incomplete, and that the City of Wichita has yet to vote on it. Ranzau made a motion that the item be tabled until the agreement is complete. That motion failed, with only Peterjohn voting in support.

    In other discussion, Ranzau repeated his concern over approving an incomplete document, telling commissioners that this would not be done in the private sector, adding that this is what it means that you can’t “run government like a business.”

    In his remarks, Peterjohn quoted a government official famously who said “you have to pass the document to find out what’s in it.” Peterjohn expressed concern that the analysis provided by CEDBR is based on numbers provided by the company. This qualification is standard, he said, and always a concern.

    The measure passed by a vote of three to two, with Peterjohn and Ranzau opposed.

    Excerpt from the meeting

    Discussion

    Capacity
    The labor force in the Wichita metropolitan area is about 298,000 people. The 50 jobs to be created in the first year by Figeac represents 0.017 percent of the labor force, or one job for every 5,960 people in the labor force.

    Another way to place the 50 Figeac jobs in context is to look at them in comparison to jobs created, not the labor force. In Kansas in recent years, job gains in the private sector are about six percent of employment. (Figures are not available for Wichita alone.) Employment in the Wichita metropolitan area is about 284,000. Six percent of that is 17,040. So the 50 Figeac jobs are now 0.29 percent of all jobs created in a year, or one out of 341 jobs.

    It’s good that 50 people will have jobs. Recall, however, that the president of the chamber of commerce told commissioners that staff worked very hard to acquire these jobs. He called this “a great moment.”

    This illustrates a problem with targeted economic development incentives. Making deals takes a lot of time and effort. Three top officials attended the commission meeting, and they will likely attend the Wichita city council meeting where the incentive is presented. Much time of county staff was required.

    Our economic development agencies and local governments do not have the capacity to strike enough deals to account for significant job growth. A better strategy is to create an environment where business firms can form and expand organically, without requiring or depending on government assistance.

    Is the incentive necessary?
    The quotation from a newspaper article seven months old that described Figeac’s commitment to grow in Wichita raises suspicions of what is commonly alleged: That companies make location and expansion plans for business reasons. Then, some may seek incentives, even though the decision has already been made. Local economic development officials are eager to accommodate the request for incentives, as they need to justify their existence and notch a few sure wins. Most politicians, of course, are more than willing to take credit for creating jobs.

    Are there other incentives?
    The Sedgwick County commissioners had to make a judgment on the wisdom of incentives without knowledge of all the incentives the company may receive. The City of Wichita had not acted on a similar loan request and property tax abatements. The State of Kansas would not disclose what incentives it had offered to Figeac.

    We don’t know, but a program that Figeac may qualify for is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees. This can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions earning $40,000 annually, the withholding would be $27 per week, or $1,404 annually. For a married person with two children, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values.

    (Since unmarried workers have higher withholding rates than married workers, and those with fewer exemptions have more withheld than those with many, does this provide incentives for companies in the PEAK program to adjust their hiring preferences?)

    Who benefits?
    As is common, incentives are justified by a benefit-cost analysis that purports to show that more comes in to government coffers than goes out due to the incentive. But the “benefits” that go into this calculation are quite different from the profits that business firms attempt to earn.

    Here’s a question: In his presentation, the county’s chief financial officer said the benefit to the county over ten years is $317,834. What will the county do with that money? Will it reduce taxes by that amount? That is what would benefit the taxpayers that paid to provide the incentive. But that doesn’t happen. Instead, the benefit is spent.

    The entire process assumes that these benefit-cost ratios are valid. This is far from certain, as follows:

    1. The benefits in the calculation are not really benefits. Instead, they’re in the form of projected higher tax revenues collected by governments. This is very different from the profits that private sector companies earn from their customers in voluntary market transactions.

    2. Government claims that in order to get these “benefits,” incentives are necessary. But often the new economic activity (relocation, expansion, etc.) would have happened without the incentives.

    3. Even if government collects more tax by offering incentives, it should not be the goal of government to grow just for the sake of growing.

    4. Why is it that many companies are able to grow without incentives, but only a few companies require incentives? What is special about these companies? Why do some companies receive incentives year after year?

    Diversification
    wichita-detroit-job-industry-concentrationWe’ve been told for many years that Wichita needs to diversify its economy. The Wichita economy is highly dependent on one industry — aircraft manufacturing — and Figeac is in the aircraft industry. When citizens have told the Wichita City Council that offering incentives to aircraft companies serves to make it more difficult to diversify, the president and chair of the Wichita Metro Chamber of Commerce complained in an op-ed: “Would the anti-business voices’ diversification strategy be to send aviation jobs to other cities and states, thereby crippling our economy? Where’s the logic in that?” This says a great deal about the problems with economic development in Wichita, namely that our leaders see no difference between business and capitalism, and that the need for diversification is merely a slogan that is not followed to in any meaningful way.

    The nature of the game
    The explanation by Chase spotlights some of the difficulties in economic development. The negotiations are not complete, but government approval is needed. More broadly, economic development officials are not negotiating the use of their own capital or capital that has been entrusted to them. They’re spending someone else’s money, for which there is little incentive to bargain wisely.

    Commissioners were told that Figeac is a successful company. Why, then, does it need incentives?

  • Research on economic development incentives

    As Wichita considers how to grow its economy, its reliance on targeted economic development incentives should be guided by research, not the grandstanding of politicians and bureaucrats.

    symbols-going-upwardsHere’s a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view. “Peer-reviewed” means these studies were stripped of identification of authorship and then subjected to critique by other economists, and were able to pass that review.

    Ambrosius (1989). National study of development incentives, 1969 — 1985.
    Finding: No evidence of incentive impact on manufacturing value-added or unemployment, thus suggesting that tax incentives were ineffective.

    Trogan (1999). National study of state economic growth and development programs, 1979 — 1995.
    Finding: General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).

    Gabe and Kraybill (2002). 366 Ohio firms, 1993 — 1995.
    Finding: Small reduction in employment by businesses which received Ohio’s tax incentives.

    Fox and Murray (2004). Panel study of impacts of entry by 109 large firms in the 1980s.
    Finding: No evidence of large firm impacts on local economy.

    Edmiston (2004). Panel study of large firm entrance in Georgia, 1984 — 1998
    Finding: Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious.

    Hicks (2004). Panel study of gaming casinos in 15 counties (matched to 15 non-gambling counties).
    Finding: No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across industries.

    LaFaive and Hicks (2005). Panel study of Michigan’s MEGA tax incentives, 1995 — 2004.
    Finding: Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roughly $125,000 per job.

    Hicks (2007a). Panel study of California’s EDA grants to Wal-Mart in the 1990s.
    Finding: The receipt of a grant did increase the likelihood that Wal-Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal-Mart), but this had no effect on retail employment overall.

    Hicks (2007b). Panel study of entry by large retailer (Cabela’s).
    Finding: No permanent employment increase across a quasi-experimental panel of all Cabela’s stores from 1998 to 2003.

    (Based on Figure 8.1: Empirical Studies of Large Firm Impacts and Tax Incentive Efficacy, in Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, Russell S. Sobel, editor. Available here.)

    In discussing this research, the authors of Unleashing Capitalism explained:

    Two important empirical questions are at the heart of the debate over targeted tax incentives. The first is whether or not tax incentives actually influence firms’ location choices. The second, and perhaps more important question, is whether, in combination with firms’ location decisions, tax incentives actually lead to improved local economic performance.

    We begin by noting that businesses do, in fact, seem to be responsive to state and local economic development incentives. … All of the aforementioned studies, which find business location decisions to be favorably influenced by targeted tax incentives, also conclude that the benefits to the communities that offered them were less than their costs.

    References:

    Ambrosius, Margery Marzahn. 1989. The Effectiveness of State Economic Development Policies: A Time-Series Analysis. Western Political Quarterly 42:283-300.
    Trogen, Paul. Which Economic Development Policies Work: Determinants of State Per Capita Income. 1999. International Journal of Economic Development 1.3: 256-279.
    Gabe, Todd M., and David S. Kraybill. 2002. The Effect of State Economic Development Incentives on Employment Growth of Establishments. Journal of Regional Science 42(4): 703-730.
    Fox, William F., and Matthew Murray. 2004. Do Economic Effects Justify the Use of Fiscal Incentives? Southern Economic Journal 71(1): 78-92.
    Edmiston, Kelly D. 2004. The Net Effects of Large Plant Locations and Expansions on County Employment. Journal of Regional Science 44(2): 289-319.
    Hicks, Michael J. 2004. A Quasi-Experimental Estimate of the Impact of Casino Gambling on the Regional Economy. Proceedings of the 93rd Annual Meeting of the National Tax Association.
    LeFaivre, Michael and Michael Hicks 2005. MEGA: A Retrospective Assessment. Michigan:Mackinac Center for Public Policy.
    Hicks, Michael J. 2007a. The Local Economic Impact of Wal-Mart. New York: Cambria Press.
    Hicks, Michael J. 2007b. A Quasi-Experimental Test of Large Retail Stores’ Impacts on Regional Labor Markets: The Case of Cabela’s Retail Outlets. Journal of Regional Analysis and Policy, 37 (2):116-122.

  • WichitaLiberty.TV: The need for reform at Wichita City Hall

    WichitaLiberty.TV: The need for reform at Wichita City Hall

    In this episode of WichitaLiberty.TV: An episode this week at the Wichita city council meeting highlights the need for campaign finance reform in Wichita. We’ll examine a few incidents and see if there’s a way we can reform Wichita city government so that it is capitalism friendly instead of crony friendly. View below, or click here to view at YouTube. Episode 69, broadcast December 21, 2014.