Tag: Economic development

  • Economic development incentives in Wichita: A few questions

    Economic development incentives in Wichita: A few questions

    Wichita justifies its use of targeted economic development incentives by citing benefit-cost ratios that are computed for the city, county, school district, and state. If the ratio exceeds a threshold, the project is deemed worthy of investment.

    Wichita City Budget Cover, 1962The 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. 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.

    3. 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.

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

    5. If the relatively small investment the city makes in incentives is responsible for such wonderful outcomes in terms of jobs, why doesn’t the city do this more often? If the city has such power to create economic growth, why is anyone unemployed?

  • The Kansas economy under guidance of moderates

    The Kansas economy under guidance of moderates

    Before wishing for a return to the “good old days,” let’s make sure we understand the record of the Kansas economy.

    Some in Kansas are calling for a return to the “moderate” and “reasonable” policies of past leadership, with a particular nostalgia for the tenures of governors Bill Graves and Kathleen Sebelius. But before getting what we wish for, let’s make sure we understand the history of the Kansas economy.

    In September 2005 the Center for Economic Development and Business Research at Wichita State University published a report titled “Measuring Economic Performance for the 50 States and the District of Columbia.” The data covers the ten years between 1994 and 2003. For context, Bill Graves became governor of Kansas in 1995 and served for eight years. Following is a sample from that document. It reads:

    It is clear that the Kansas economy has not performed well over the past 10 years. With the exception of job creation (middle third), Kansas has ranked among the bottom third of states across economic performance measures. Kansas has performed below the average for the Plains States Region in 5 out of the 6 measures examined as well. (Job growth in Kansas equaled the regional average at 1.4 percent annually.)

    Kansas Economic Performance, from Center for Economic Development and Business Research at Wichita State University, September 2005

    Let’s be careful what we wish for in Kansas.

  • CEDBR fiscal model presentation to Wichita City Council

    An explanation of how cost benefit ratios are calculated for economic development incentives. From Center for Economic Development and Business Research, Wichita State University. 2011. View below, or click here to open in new window.

  • For Wichita leaders, novel alternatives on water not welcome

    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.

    This week Kansas Policy Institute held an educational form on the issues of water in the Wichita area. The event featured four presentations with questions and answers, with most being about one hour in length.

    This was a welcome and important event, as the city is proposing to spend several hundred million dollars on an increased water supply. It is likely that citizens will be asked to approve a sales tax to pay this cost. It’s important that we get this right, and citizen skepticism is justified. The city has recently spent $247 million on a water project that hasn’t yet proved its value over a reasonably long trial. A former mayor has told audiences that he was assured Wichita had adequate water for the next 50 years. It was eleven years ago he was told that. Wichita’s current mayor has admitted that the city has not spent what was needed to maintain our current infrastructure, instead pushing those costs to the future.

    Most of the information that Wichitans have access to is provided by city government. So when an independent group produces an educational event on an important topic, citizens might hope that Wichita city officials take part.

    And, Wichita city officials did take part. The second of the four presentations was delivered by Wichita public works director Alan King and council member Pete Meitzner (district 2, east Wichita). City governmental affairs director Dale Goter and council member Lavonta Williams were in the audience.

    But after this presentation ended, the four city officials left.

    What did they miss? They missed two additional presentations, or half the program. The city officials did not hear a presentation by Dr. Art Hall of Kansas University which presented novel ideas of using markets for water resources. Particularly, how Wichita could secure increased water supply by purchasing water rights and using the infrastructure it already has in place.

    In the final presentation, the audience asked questions that the presenter was not able to answer. City officials like public works director King would have been able to provide the answers.

    I understand that city council members are part-time employees paid a part-time salary. Some have outside jobs or businesses to run. But that’s not the case with the city’s public works director or its governmental affairs director.

    Come to think of it, where was the city manager? Assistant city manager? Other council members? The city’s economic development staff?

    Where was Mayor Carl Brewer?

    If you’ve attended a city council meeting, you may have to sit through up to an hour of the mayor issuing proclamations and service awards before actual business starts. Fleets of city bureaucrats are in the audience during this time.

    But none of these would spend just one hour listening to a presentation by a university professor that might hold a solution to our water supply issue.

    I understand that city officials might not be the biggest fans of Kansas Policy Institute. It supports free markets and limited government.

    But city officials tell us that they want to hear from citizens. The city has gone to great lengths to collect input from citizens, implementing a website and holding numerous meetings.

    About 70 people attended the KPI forum. Citizens were interested in what the speakers had to say. They sat politely through the presentation by the two city officials, even though I’m sure many in the audience were already familiar with the recycled slides they’d seen before.

    But it appears that Wichita city officials were not interested in alternatives that weren’t developed by city hall. They can’t even pretend to be interested.

  • Economic development incentives, at the margin

    Economic development incentives, at the margin

    visualization-exampleThe evaluation of economic development incentives requires thinking at the margin, not the entirety.

    When considering the effect of economic development incentives, cities like Wichita use a cost-benefit analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts, although these jurisdictions have no say over whether the incentive is granted, with a few exceptions. The basic idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a profit, too.

    Economic activity generates tax revenue flowing to governmental agencies. When people work, they pay income taxes. When they buy stuff, they pay sales taxes. When they create new property or upgrade existing property, it is taxed.

    In the calculation of cost-benefit ratios, when a company receives economic development incentives, government takes credit for the increase in tax revenue. Government often says that without the incentive, the company would not have located in Wichita. Or, it might not have expanded in Wichita. Or these days, it is claimed that incentives are necessary to persuade companies to consider remaining in Wichita rather than moving somewhere else.

    But there are a few problems with the arguments that cities and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. What about all the companies that locate to or expand in Wichita without receiving incentives?

    Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive that enabled a huge deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.

    The importance of marginal thinking

    Here’s an example of the importance of looking at marginal gains rather than the whole enchilada. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.

    Wichita City HallThe important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.

    What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity. For more, see Wichita new home tax rebate program: The analysis.

  • Tactics that hurt the economy

    Wichita could innovate and gain attention by opting out of the harmful practice described in the following article.

    How an oft-used economic development tactic may actually be hurting the economy

    By J.D. Harrison, Washington Post

    If you can’t build your own, steal someone else’s.

    That, one economist notes, has become the default strategy for state and city governments in their pursuit of rapidly growing businesses, with many offering increasingly lucrative incentive packages to encourage employers to move to and create jobs in their districts.

    However, that’s hardly the most sustainable method to promote the country’s economic growth — and there’s new evidence that it’s not particularly effective at a local level, either.

    Continue reading at Washington Post.

  • WichitaLiberty.TV: Water, waste, signs, gaps, economic development, jobs, cronyism, and water again.

    WichitaLiberty.TV: Water, waste, signs, gaps, economic development, jobs, cronyism, and water again.

    In this episode of WichitaLiberty.TV: A look at a variety of topics, including an upcoming educational event concerning water in Wichita, more wasteful spending by the city, yard signs during election season, problems with economic development and cronyism in Wichita, and water again. View below, or click here to view at YouTube. Episode 50, broadcast July 6, 2014.

  • Examining Wichita’s water future

    Examining Wichita’s water future

    From Kansas Policy Institute.

    water fountain gargoyles fountain-197334_640A proposal before the Wichita City Council would raise the sales tax in the city by 1% to fund several projects. The biggest piece of the proposal would be to fund additional water capacity for users of the city water system.

    On Thursday 17 July, come hear from the City of Wichita and others on the scope of the problems, possible solutions, and the perspectives of several experts in the debate.

    Click here to register for this event.

    Date: Thursday 17 July
    When: 7:30 a.m. registration and 8:00 a.m. start to presentations
    Where: Wichita State University MetroPlex Room 132 ( 29th and Oliver)
    Cost: Free with Advance Registration

    A light breakfast will be served. The session will conclude by 12:15 p.m.

    Speaker Line-up and Agenda:
    7:30 a.m. — Registration and Breakfast
    8:00 a.m. — Kansas Water Office on scope of water usage/needs in SCKS
    9:00 a.m. — City of Wichita Proposal: Alan King, Dir. of Public Works, accompanied by Councilman Pete Meitzner
    10:00 a.m. — Are Water Markets Applicable in Kansas?: Dr. Art Hall, executive director of the Center for Applied Economics at the University of Kansas
    11:00 a.m. — Wichita Chamber of Commerce Water Task Force Findings: Karma Mason, president of iSi Environmental

    KPI is not taking a position of the water proposal before the City Council. This event is to provide a forum for relevant parties to present their perspective on the issue with the public. Each presenter will have 30 minutes for a presentation followed by an Q&A.

    This is the first in a series of KPI-sponsored forums of this nature on the different aspects of the sales tax proposal. Future forums will be held on the economic development and street and transit proposals.

    For more information about this event contact Kansas Policy Institute at 316.634.0218. To register, click here.

  • In Wichita, gap analysis illustrates our problems

    Wichita City Hall.
    Wichita City Hall.
    Following is testimony provided to the Wichita City Council on July 1, 2014. Background on this issue may be found at In Wichita, a public hearing with missing information and Wichita city council schools citizens on civic involvement.

    Thank you for providing the gap analysis that I requested.

    If the gap analysis is credible, if it really is true that projects like this are not financially feasible without taxpayer assistance, what does that tell us about Wichita? Shouldn’t we work on fixing these problems for everyone, rather than parceling out business welfare on a piecemeal basis?

    The agenda packet material for this item says there is a need for incentives “based on the current market.” But not long ago this council was told that downtown Wichita is booming. So why won’t the market support a project like this without a handout from city taxpayers? And if downtown is truly booming but we’re still giving out incentives, will we ever be able to wean ourselves off?

    Based on my reading of the gap analysis document, I see another problem with the facade improvement program. It shifts costs from landlords to commercial tenants. Instead of paying for the facade improvement costs as part of a mortgage or other financing, these costs become additional property taxes that commercial tenants pay in addition to rent.

    This is really a problem, as Kansas and Wichita commercial property taxes are high. Each year The Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence survey property taxes. Considering the largest city in each of the states, Wichita property taxes are ninth highest in the nation for commercial property.

    Wichita taxes are not just a little higher, but a lot higher. For example, for a commercial property valued at $100,000, Wichita property taxes are 38.5 percent higher than the national average.

    Some of the reason why commercial property taxes are so high is due to the difference in assessment rates for various property classes. That’s not set by the City of Wichita. But the overall level of spending, and therefore the level of taxation, is set by this council. Further, the cost of incentives like this raise the cost of government for everyone else. One thing the city could do is to reduce spending somewhere else to offset the cost of this incentive. This would mean that other taxpayers do not have to bear the cost of this incentive.

    If we wonder why the Wichita economy is not growing, commercial property tax rates and this council’s policy of targeted reductions are a large part of the problem.