Voice For Liberty

Tag: Economics

Economic development incentives, at the margin
The 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.
The 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.
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July 14, 2014
Job growth in the states and Kansas
Let’s ask critics of current Kansas economic policy if they’re satisfied with the Kansas of recent decades.
Critics of Kansas Governor Sam Brownback and his economic policies have pounced on slow job growth in Kansas as compared to other states.
Private sector employment growth in the states, Kansas highlighted. Click for larger version.
The nearby illustration shows private sector job growth in the states during the period of the Graves/Sebelius/Parkinson regimes. This trio occupied the governor’s office from 1994 to 2011. Kansas is the dark line.
At the end of this period, Kansas is just about in the middle of the states. But notice that early in this period, the line for Kansas is noticeably nearer the top than the bottom. As time goes on, however, more states move above Kansas in private sector job creation.
Private sector employment growth in the states, year-over-year change, Kansas highlighted. Click for larger version.
The second illustration shows the one-year change in private sector job growth, Kansas again highlighted. Note there are some years during the first decade of this century where Kansas was very near the bottom of the states in this measure.
Some Kansas newspaper editorialists and candidates for office advocate for a return to the policies of Graves/Sebelius/Parkinson. Let’s ask them these questions: First, are you aware of the poor record of Kansas? Second, do you want to return to job growth like this?
How to use the visualization.
I’ve gathered and prepared jobs data in an interactive visualization. You may click here to open the visualization in a new window and use it yourself. Data is from Bureau of Labor Statistics, U.S. Department of Labor. This data series is the Current Employment Statistics (CES), which is designed to measure employment, hours, and earnings with significant industrial and geographic detail. More information about his data series is at Understanding the employment measures from the CPS and CES survey.
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July 7, 2014
Examining Wichita’s water future
From Kansas Policy Institute.
A 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.
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July 2, 2014
Corporate income tax rates in U.S. are self-defeating
Over the past two decades most large industrial countries have reduced their corporate income tax rates. Two countries, however, stand out from this trend: France and The United States.
In Abolish the Corporate Income Tax economist Laurence J. Kotlikoff writes “I, like many economists, suspect that our corporate income tax is economically self-defeating — hurting workers, not capitalists, and collecting precious little revenue to boot.”
High taxes in America cause companies to invest overseas in order to escape these high American taxes. For example, Apple takes steps to minimize the income tax it pays, as do most companies. In Calculating Apple’s True U.S. Tax Rate law professor Victor Fleischer explains and estimates what rate Apple pays:
The whole point of the Senate hearing was to show how Apple shifts substantial amounts of its economic profits from the United States to Ireland, where they are taxed at a rate close to zero. Those profits are then sheltered in Ireland and untaxed unless Apple decides to bring the cash back to the United States.
These overseas profits create deferred tax liabilities that will not be taxed until the cash is repatriated. But Apple is reluctant to repatriate its overseas cash; it would rather lobby for another tax holiday and bring the cash back tax-free. An added benefit of a tax holiday for Apple is that it would provide a quick jump in reported earnings when the accounting entry for the deferred tax liability is reversed. …
Thus, Apple’s “true U.S. tax rate,” according to my own calculation, was 8.2 percent.
The corporate income tax rate in the United States is 35 percent. So how does Apple pay such a lower rate to the U.S? It locates operations overseas. It earns profits overseas, and pays taxes there.
Using the visualization.
If corporate tax rates were lowered, we’d see more economic activity here rather than overseas. That would help workers in America, as they can’t easily move their capital and investments overseas to take advantage of lower tax rates. But the wealthy — like Apple’s shareholders — can do that, and they have.
Using data gathered by Tax Policy Center at Brookings Institution, I’ve prepared an interactive visualization of corporate income tax rate trends over time. Click here to open the visualization in a new window.
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June 30, 2014
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.
Tomorrow the Wichita City Council considers whether to grant property and sales tax exemptions to a proposed speculative industrial building in north central Wichita. If approved, this will be the second project undertaken under new economic development policies that allow for this type of tax exemption.
City documents estimate that the property tax savings for the first year will be $312,055. This exemption will be granted for five years, with a second five year period possible if performance goals are met.
The city documents also state that the project will also apply for a sales tax exemption, but no estimate of these tax savings are given. It’s common for a project of this type to have about half its cost in purchases subject to sales tax. With “site work and building” at $10,350,000, sales tax in Wichita on half that amount is $370,012. Undoubtedly a rough estimate, it nonetheless gives an idea of how much sales tax the developers will avoid paying.
(If city hall has its way, the sales tax in Wichita will soon increase by one cent per dollar, meaning the developers of this project would save $421,762 in sales tax. While others will hurry to make purchases before the higher sales tax rate takes effect — if it does — these developers will be in no hurry. Their sales tax is locked in at zero percent. In fact, once having a sales tax or property tax exemption, these developers are now in a position to root for higher sales and property tax rates, as that increases costs for their competitors, thereby giving these tax-exempt developers a competitive advantage.)
City documents give the benefit-cost ratios for the city and overlapping jurisdictions:
City of Wichita General Fund 1.30 to one
Sedgwick County 1.18 to one
USD 259 1.00 to one
State of Kansas 12.11 to one
It’s not known whether these ratios include the sales tax forgiveness.
While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.
When the city granted a similar tax exemption to a speculative warehouse in southwest Wichita, my estimates were that its landlord has a cost advantage of about 20 percent over other property owners. Existing industrial landlords in Wichita — especially those with available space to rent and those who may lose tenants to this new building — must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.
Wichita property taxes
Property taxes in Wichita are high for industrial buildings, and even higher for commercial buildings. See Wichita property taxes compared. So it’s difficult to blame developers for seeking relief. But instead of offering tax relief to those who ask and to those city hall approves of, it would be better to have lower taxes for everyone.
Targeted economic development incentives
The targeted economic development efforts of governments like Wichita fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. In the case of the Wichita, do we really know which industries should be targeted? Is 1.3 to one really the benchmark we should seek, or would we be better off by insisting on 1.4 to one? Or should we relax the requirement to 1.2 to one so that more projects might qualify?
This assumes that these benefit-costs ratios have validity. This is far from certain, as follows:
1. The benefits that government claims are not really benefits. Instead, they’re in the form of higher tax revenue. This is very different from the profits companies earn in voluntary market transactions.
2. Government claims that in order to get these “benefits,” the incentives must be paid. But often the new economic activity (expansion, etc.) would have happened anyway without the incentives.
3. Why is it that most companies are able to grow without incentives, but only a few companies require incentives? What is special about these companies?
4. If the relatively small investment the city makes in incentives is solely responsible for such wonderful outcomes in terms of jobs, why doesn’t the city do this more often? If the city has such power to create economic growth, why is anyone unemployed?
Do incentives work?
The uncontroverted peer-reviewed research tells us that targeted economic development incentives don’t work, if we consider the entire economy. See: Research on economic development incentives. Some of the conclusions of the studies listed there include:
“No evidence of incentive impact on manufacturing value-added or unemployment”
“Small reduction in employment by businesses which received Ohio’s tax incentives”
“No evidence of large firm impacts on local economy”
“No permanent employment increase across a quasi-experimental panel of all Cabela’s stores”
“Employment impact of large firms is less than gross job creation (by about 70%)”
These research programs illustrate the fallacy of the seen and the unseen. It is easy to see the jobs being created by economic development incentives. It’s undeniable that jobs are created at firms that receive incentives, at least most of the time. But these jobs are easy to see. It’s easy for news reporters to find the newly-hired and grateful workers, or to show video footage of a new manufacturing plant.
But it’s very difficult to find specific instances of the harm that government intervention produces. It is, generally, dispersed. People who lose their jobs usually don’t know the root cause of why they are now unemployed. Businesses whose sales decline often can’t figure out why.
But evidence tells us this is true: These incentives, along with other forms of government interventionism, do more harm than good.
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June 9, 2014
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.
Two states have annual payroll costs of over $4,000, calculated by taking the total payroll cost and dividing by population. Many states operate on little more than half that. Only ten states have total government employee payroll costs greater than Kansas, on a per-person basis. (This does not include federal government employees.)
When looking at a selection of nearby states, we see that only Nebraska has higher payroll costs for state and local government employees, when calculated on a per-person basis using the state’s population.
This data is from the U.S. Census Bureau for 2012, the most recent year available. Using Tableau Public, I created an interactive visualization. I show the full-time equivalent employees divided by the population for each state. Also, the annual payroll divided by population. (The Census Bureau supplies payroll data for only one month, the month of March, so I multiply by 12 to produce an approximation of annual payroll cost.)
Using the visualization: Sorting and selecting.
There are two series of data, “Local government” and “State government.” The first series refers to the number of local government employees in each state, such as city and county employees. The second series refers to the number of state government employees in each state. Check boxes allow you to include either or both series in the chart.
By clicking on column headers or footers (“State,” “Annual payroll per person,” Full-time equivalent employees per person”) you can sort by these values.
Click here to open the visualization in a new window. Data is from United States Census Bureau, Government Employment & Payroll, released March 2014.
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June 3, 2014
Tax collections by the states
Kansas state government collects more tax revenue than most surrounding states. Additionally, severance taxes are a minor contribution to collections, even in Texas.
Note: this visualization has been updated. Click here for the most recent version.
The United States Census Bureau conducts an Annual Survey of State Government Tax Collections. It’s useful to gather figures for Kansas and some nearby states.
The data considers only tax collections by state government. It does not include cities, counties, school districts, or the many other taxing jurisdictions that states may have formed. I have computed this data on a per-person basis. Data is for 2013.
State tax collections for Kansas and some nearby states. Click for a larger version.
Considering total tax collections by state governments, note that Kansas, at $2,633 per person per year, is only slightly below the average for all states. For a group of nearby states, Arkansas and Iowa have higher state tax collections than Kansas. Nebraska, Oklahoma, Colorado, Texas, and Missouri are lower.
In some cases, state tax collections are substantially lower. Texas collects $1,955 per person per year, which is 25.75 percent less than Kansas.
Using the visualization.
Of note are severance taxes, which are taxes collected based on the extraction of oil, gas, and sometimes minerals. Kansas has a severance tax that produces, on a per person basis, $26 per year. In Texas the same tax produces $176 per person per year, and in Oklahoma, $134.
I’ve created an interactive visualization of this data that you may use. Click here to open the visualization in a new window.
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June 2, 2014
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.
The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, March 2014” and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. A pdf version of the table is available here.
A pdf version of this table is available; click here.
In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.
This means that commercial property pays 25 / 11.5 or 2.18 times the property tax rate as residential property. (The study reports a value of 2.263 for Wichita. The difference is likely due to the inclusion on utility property in their calculation.) The U.S. average is 1.716.
Whether higher assessment ratios on commercial property as compared to residential property is good public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.
For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.324 percent, while the national average is 1.508 percent. The results for a $300,000 property were similar.
Wichita commercial property tax rates compared to national average
Looking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,591 or 2.159 percent of the property value. For Wichita the corresponding values are $3,588 or 2.990 percent, ranking ninth from the top. Wichita property taxes for this scenario are 38.5 percent higher than the national average.
In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.
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June 2, 2014
Krugman on solutions to health care
Following are excerpts from New York Times columns by economist and Nobel Laureate Paul Krugman. You may tweet your reaction to him at @NYTimeskrugman.
Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system’s success provides a helpful corrective to anti-government ideology. For the government doesn’t just pay the bills in this system — it runs the hospitals and clinics.
No, I’m not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate. (Health Care Confidential, January 27, 2006)
“You see, we actually have a real live case of impressive cost control in health care: the VA system.” (Medicare and the VA, May 27, 2009)
What Mr. Romney and everyone else should know is that the V.H.A. is a huge policy success story, which offers important lessons for future health reform.
Many people still have an image of veterans’ health care based on the terrible state of the system two decades ago. Under the Clinton administration, however, the V.H.A. was overhauled, and achieved a remarkable combination of rising quality and successful cost control. Multiple surveys have found the V.H.A. providing better care than most Americans receive, even as the agency has held cost increases well below those facing Medicare and private insurers. Furthermore, the V.H.A. has led the way in cost-saving innovation, especially the use of electronic medical records.
What’s behind this success? Crucially, the V.H.A. is an integrated system, which provides health care as well as paying for it. So it’s free from the perverse incentives created when doctors and hospitals profit from expensive tests and procedures, whether or not those procedures actually make medical sense. And because V.H.A. patients are in it for the long term, the agency has a stronger incentive to invest in prevention than private insurers, many of whose customers move on after a few years. (Vouchers for Veterans, November 13, 2011)
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June 1, 2014