Letter from ALEC to Kansas lawmakers. Click to read.To balance the budget, there are many things Kansas lawmakers could do other than raising taxes.
In congratulating Kansas lawmakers for passing a pro-growth tax cut, American Legislative Exchange Council (ALEC) reminds everyone that there is more than one way to balance a budget. Spending needs to be addressed:
However, as budget realities need to be addressed, the spending side of the fiscal coin is a good place to start. ALEC has conducted non-partisan research on how states can make government more efficient. In the State Budget Reform Toolkit, case studies and policy options are examined that allow the state to maintain core services of government at a lower cost. One example is to eliminate positions in state agencies that have been vacant for more than six months, or to adopt a sunset review process for state agencies, boards and commissions. These examples and many more can be found on our website for your review.
Some of the ideas in the State Budget Reform Toolkit have been considered and rejected by the Kansas Legislature. Others have not been considered, as far as I know. Most take more than one year to implement. These ideas remind us that when the Kansas Legislature and Governor Brownback cut taxes for everyone, they did not start planning for lower spending.
If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is data to tell us why: Our tax rates are too high.
In 2012 the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms. (Starting in 2013, Kansas income tax rates are lower, and we would expect that Kansas would rank somewhat better if the study was updated.)
The study is unusual in that it looks at the impact of state tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”
The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store the rank is 38th, while new is ranked 45th.
There are more categories. Kansas ranks well in none.
The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.
Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.
For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.
For a mature and new retail store, Wichita ranks 38th and 45th, respectively.
For a mature and new call center, Wichita ranks 43rd and 47th, respectively.
Kansas tax cost compared to neighborsIn its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”
It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.
The record in Wichita
Earlier this year Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for 2014. GWEDC says its efforts created or retained 424 jobs.
This report shows us that power of government to influence economic development is weak. GWEDC’s information said these jobs were for the geographical area of Sedgwick County. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2014 was 247,614 persons. So the jobs created by GWEDC’s actions amounted to 0.14 percent of the labor force. This is a vanishingly small fraction. It is statistical noise. Other economic events overwhelm these efforts.
GWEDC complains of not being able to compete because Wichita has few incentives. This is not true, as Wichita has many incentives to offer. Nonetheless, GWEDC says it could have created or retained another 3,010 jobs if adequate incentives had been available. Adding those jobs to the jobs it claims credit for amounts to 1.39 percent of the labor force, which is still a small number that is overwhelmed by other events.
Our tax costs are high
The report by the Tax Foundation helps us understand one reason why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.
While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”
It seems in Wichita that the thinking of our leaders has not reached the level of maturity required to understand that targeted incentives have great cost and damage the business climate. Instead of creating an environment in which all firms have a chance to thrive, government believes it can identify firms that are subsidy-worthy — at the exclusion of others.
But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs or granting incentives to the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas to escape hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas has been pursuing and Wichita’s leaders want to ramp up: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”
There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.
We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances, except to reduce the cost of government for everyone.
In this episode of WichitaLiberty.TV: The failure of Kansas lawmakers to reform state spending means you will pay. A newspaper editorial excuses bad behavior by government. Then: What do classical liberals and libertarians believe? View below, or click here to view at YouTube. Episode 85, broadcast May 24, 2015.
Why won’t Kansas Center for Economic Growth show its calculations and explain its data sources? Dave Trabert of Kansas Policy Institute explains.
KCEG misleads on job growth — again
By Dave Trabert
The latest misleading claim on job growth from the Kansas Center for Economic Growth is loaded with misleading and irrelevant information; they don’t fully disclose their methodology and at this writing they have ignored our request to explain it. Sadly, this is not the first, second or even third time that KCEG has published misleading information and declined to produce documentation.
Here are the questions we posed to Annie McKay, executive director at KCEG:
We received a ‘read’ receipt but no reply, so we attempted to replicate their methodology to arrive at what they call “private sector job growth since tax changes” which they measure between January 2013 and March 2015. Based on tests of Kansas and national data, it appears that KCEG is using seasonally adjusted jobs but we couldn’t find a 6-state region including all of Kansas’ neighbors to match their number.
KCEG has the national average increasing 5.2% and Kansas 3.8%, so we assume they are comparing January 2013 to March 2015. This is not a true measure of post-tax reform activity, however; the base month of a point-to-point comparison should be the last month of the old tax system, which was December 2012. Comparing Kansas to the 5-state region does show that Kansas is slightly behind (4.0% vs. 4.2%) but by not showing the performance of individual states, KCEG hides the fact that Kansas beat three of its four neighbors.
While Kansas is outperforming three of its neighboring states on this measurement, point-to-point comparisons are problematic; one or both points can be unusual spikes or declines, making the data less reliable. The Bureau of Labor Statistics also publishes average annual employment, which minimizes the impact of any single data point.
The more stable comparisons of average annual employment show job growth trends for Kansas to be much more competitive since tax reform. Private sector jobs grew just 2.2% between 1998 and 2012, which ranked Kansas at #38, but Kansas moved up to #27 in 2013 and last year moved up again to #21. That’s still not good enough and it will take perhaps another decade to fully understand the impact of tax reform, but the early trend is very encouraging. Kansas still trails Colorado, but has improved its competitive position. The table below shows Kansas trailed Colorado by a factor of five (2.2% vs. 10.6%) between 1998 and 2012 but has since closed the gap to a factor of two.
KCEG noted that Utah and Idaho have higher taxes on “the wealthy” and better job growth than Kansas, but of course they don’t tell the whole story. Kansas does have a lower marginal rate than both states but that is a recent development; Kansas was higher than Utah until 2013 and much closer to Idaho when the marginal was 6.45%. Kansas’ lower rates are helping to reverse trends but it will take much more time to catch up to states that historically grew much faster – like Utah and Idaho.
Here’s the rest of the story that KCEG doesn’t want you to know. According to the Tax Foundation, the corporate income tax rate in Kansas is 40% higher than Utah’s and just slightly below Idaho’s. State sales tax rates are comparable but Kansas has much higher local sales tax rates.
Utah and Idaho also have much lower property taxes on commercial and industrial real estate. Kansas has the 10th highest effective tax rate on urban property and the worst in the nation on rural property! Part of the reason that Kansas has very high effective tax rates is baked into the State Constitution, where Commercial and Industrial property is assessed at 25% of appraised value but Residential is assessed at 11.5%.
The other major factor driving up property taxes is that Kansas has too much government. Kansas and Utah have about the same population but Kansas has 1,997 cities, counties and townships whereas Utah has only 274. Idaho has just 244. Extra government means extra government employees (and higher taxes to pay for all of that government); Kansas is ranked #47 in government employees per 10,000 residents (i.e., the 3rd worst in the nation) but Utah is ranked #15 and Idaho is #9.
These truths about private sector job growth and relevant competitive issues with Utah and Idaho are typical of KCEG efforts to mislead citizens and legislators – and probably explain why they refuse to engage KPI in public debates on tax, spending and education issues.
Updated statistics show that the Wichita ASR water project has not been producing water at the projected rate, even after projections were halved.
An important part of Wichita’s water supply infrastructure is the Aquifer Storage and Recovery program, or ASR. This is a program whereby water is taken from the Little Arkansas River, treated, and injected in the Equus Beds aquifer. That water is then available in the future as is other Equus Beds water.
With a cost so far of $247 million, the city believes that ASR is a proven technology that will provide water and drought protection for many years. Last year the city recommended that voters approve $250 million for its expansion, paid for by a sales tax. Voters rejected the tax.
According to city documents, the original capacity of the ASR phase II project to process water and pump it into the ground (the “recharge” process) was given as “Expected volume: 30 MGD for 120 days.” That translates to 3,600,000,000 (3.6 billion or 3,600 million) gallons per year. ASR phase II was completed in 2011.
At a city council workshop in April 2014, Director of Public Works and Utilities Alan King briefed the council on the history of ASR, mentioning the original belief that ASR would recharge 11,000 acre feet of water per year. But he gave a new estimate for production, telling the council that “What we’re finding is, we’re thinking we’re going to actually get 5,800 acre feet. Somewhere close to half of the original estimates.” The new estimate translates to 1,889,935,800 (1.9 billion) gallons per year.
Gallons of Water Recharged Through Recharge Basins and Wells during Wichita ASR Phase II, cumulativeBased on experience, the city has produced a revised estimate of ASR production capability. What has been the actual experience of ASR? The U.S. Geological Survey has ASR figures available here. I’ve gathered the data and performed an analysis. (Click charts for larger versions.)
I’ve produced a chart of the cumulative production of the Wichita ASR project compared with the original projections and the lower revised projections. The lines for projections rise smoothly, although it is expected that actual production is not smooth. The second phase of ASR was completed sometime in 2011, but no water was produced and recharged that year. So I started this chart with January 2012.
Gallons of Water Recharged Through Recharge Basins and Wells during Wichita ASR Phase II, cumulative since July 2013Some have said that since 2013 was a drought year, we shouldn’t evaluate the production of ASR during a drought. So to present ASR in the best possible light, I’ve prepared a chart starting in July 2013. That was when it started raining so much we had floods, and data from USGS shows that the flow in the Little Arkansas River was much greater. Still, the ASR project is not keeping up with projections, even after goals were lowered.
Gallons of Water Recharged Through Recharge Basins and Wells during Wichita ASR phase IIOn the chart of monthly production, the horizontal line represents the revised (lowered) annual production projection expressed as a constant amount each month. This even rate of production is not likely, as rainfall and river flow varies. In the three years that ASR phase II has been in production, that monthly target been exceeded in just one month.
Flow of the Little Arkansas River at Valley Center. The ASR project is able to draw from the river when the flow is above 30 cfs, which is the dark line. Source of data is here.At one time the city was proud enough of the ASR project that it maintained an informative website at wichitawaterproject.org. That site no longer exists.
In this excerpt from WichitaLiberty.TV: What recourse do citizens have when elected officials are not responsive? Initiative and referendum are two possibilities. View below, or click here to view at YouTube. Originally broadcast May 3, 2015.
In making the case for more Kansas school spending, the focus on base state aid per pupil leaves out important considerations.
Much of the discussion surrounding school funding in Kansas has centered around base state aid per pupil. It’s the starting point for the Kansas school finance formula, and therefore an important number. But base state aid is not the only important number. Action taken by the Kansas Legislature has led to increases in state funding for schools at the same time that base state aid has fallen. Much of the increase is due to the conditions that schools say are costly, such as teaching students from low-income families or non-English speaking students.
School districts are compensated for these costs through weightings. If a district has a student who falls into certain categories — like qualifying for free or reduced-price lunches — that adds a weighting in that category. The number of pupils plus the number of weightings are multiplied by base state aid to determine total state aid. 1
A large weighting — in terms of its magnitude — is the bilingual education weighting, intended to cover additional costs of non-English speaking students. This weighting was originally 20 percent. Starting with the 2005-2006 school year it was raised to 39.5 percent.
Kansas school finance formula at-risk weighting history. Click for larger version.Another large weighting is the at-risk weighting, intended to cover the additional costs of teaching students from low-income families. This started at five percent. As shown in the nearby chart, it has risen by a factor of nine, reaching 45.6 percent starting with the 2008-2009 school year. This chart doesn’t include the high-density at-risk weighting. Starting with the 2006-2007 school year districts with a high concentration of at-risk students could receive an extra weighting of four percent or eight percent. Two years later the weightings were raised to six percent and ten percent. This formula was revised again in 2012 in a way that probably slightly increased the weightings.
The weightings have a large effect on school funding. For the 2004-2005 school year, base state aid was $3,863 and the at-risk weighting was ten percent. An at-risk student, therefore, generated $4,249 in funding. Other weightings might also apply.
Ten years later base state aid is $3,852 and the at-risk weighting is 45.6 percent. This generates funding of $5,609. If in a district that qualifies for the maximum high-density at-risk weighting, an additional $404 in funding is generated. (These numbers are not adjusted for inflation.)
Kansas school spending per student, compared to base state aid, adjusted for CPI, 2014. Click for larger version.As can be seen in the charts produced from data available from the Kansas State Department of Education, the ratio of total state spending to base state aid has generally risen since the adoption of the school finance formula two decades ago. For the school year ending in 1993 the ratio was 0.7, meaning that state aid was less than base state aid. For the school year ending in 2014, the ratio was 1.85, or 2.6 times as much as in 1993. This means that while base state aid per pupil for 2014 was $3,838, total spending by the state was $7,088 per pupil.
Kansas school spending per student, ratio of state aid per pupil to base state aid per pupil, 2014
AMENDMENTS TO THE 1992 SCHOOL DISTRICT FINANCE AND QUALITY PERFORMANCE ACT AND THE 1992 SCHOOL DISTRICT CAPITAL IMPROVEMENTS STATE AID PROGRAM (FINANCE FORMULA COMPONENTS), Kansas Legislative Research Department, May 20, 2014 http://ksde.org/Portals/0/School%20Finance/amends_to_sdfandqpa_2015.pdf↩
If local governments don’t fund arts, we risk a Soviet-style existence. This line of thought is precisely backwards.
Facing the possible loss of funds from Sedgwick County, the Wichita Arts Council paints a bleak future for Wichita, as reported in the Wichita Eagle:
The Wichita Arts Council receives approximately $14,000 from the county, which it uses to provide seed money for start-up art projects, president Arlen Hamilton said. It also receives about $6,000 from the city, he said.
“Without us being there to provide that start, many of these things would never get off the ground, and we’d end up with more of a Soviet-style society than the bright, colorful and educational environment that we get to live in instead,” Hamilton said. (Sedgwick County to warn organizations of possible funding cuts)
This line of reasoning is precisely backwards. When government taxes us and turns over the funds to a group of elitists to make decisions about which art is desirable and which is not, that is characteristic of totalitarian, socialist societies. In a civil society people don’t expect others to be forced to pay for things like this.
Defenders of government spending on arts say it’s a small amount of money. It’s just seed money. This “seed money” effect is precisely why government should not be funding arts. David Boaz explains:
Defenders of arts funding seem blithely unaware of this danger when they praise the role of the national endowments as an imprimatur or seal of approval on artists and arts groups. Jane Alexander says, “The Federal role is small but very vital. We are a stimulus for leveraging state, local and private money. We are a linchpin for the puzzle of arts funding, a remarkably efficient way of stimulating private money.” Drama critic Robert Brustein asks, “How could the [National Endowment for the Arts] be ‘privatized’ and still retain its purpose as a funding agency functioning as a stamp of approval for deserving art?” … I suggest that that is just the kind of power no government in a free society should have.
The leveraging effect of seed money means that elitists like the members of the Wichita Arts Council have great power in deciding who will succeed in the arts in Wichita. We give up a lot when we turn over this power to government bureaucrats and arts commission cronies. Contrary to the argument of the Arts Council president, arts thrive in markets where people are free to choose, and stagnate under taxation and bureaucracy.
The attitude of Wichita elected officials regarding art: If you don’t like this statue, just don’t go there, says Wichita City Council member Lavonta Williams. But, you still must pay for it.
A Wichita newspaper op-ed is either ignorant of, or decides to forgive and excuse, bad behavior in Wichita government, particularly by then-mayoral candidate Jeff Longwell.
In a column just before the April 2015 Wichita election, Bill Wilson, managing editor of the Wichita Business Journal, reported on fallacies during the mayoral campaign, fallacies he called “glaring.” 1 But only a juvenile interpretation of the facts surrounding the events could find them fallacious. This is especially troubling since Wilson covered city hall as a reporter for the Wichita Eagle.
The first reported fallacy concerns the award of the contract for the new Wichita airport terminal. Jeff Longwell, then a city council member, had received campaign contributions from executives of Key Construction, the local company bidding on the contract. He also received contributions from Walbridge, the Michigan partner of Key. The Walbridge contributions are problematic, as they were made just a few days before the vote. More arrived a few days after Longwell’s vote. 2
In his column Wilson had an explanation as to why the council voted the way it did. That explanation was a matter of dispute that the council had to resolve. But the validity of the explanation is not the point. The point is something larger than any single issue, which is this: The Wichita city council was asked to make decisions regarding whether discretion was abused or laws were improperly applied. It is not proper for a council member to participate in decisions like this while the ink is still wet on campaign contribution checks from a party to the dispute. Jeff Longwell should not have voted on this matter.
For that matter, several other council members should not have voted. Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) received substantial campaign contributions from Key Construction executives several months before he voted on the airport contract. So too did Wichita City Council Member and Vice Mayor Lavonta Williams (district 1, northeast Wichita) . In fact, the only contributions Williams received in 2012 were from Key Construction interests. 3
Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer has voted to send millions to Key, including overpriced no-bid contracts.Then we have Former Wichita Mayor Carl Brewer. Here he’s pictured fishing with his friend Dave Wells of Key Construction. Do you think it is proper for the mayor to have voted in a quasi-judicial role on a matter worth millions to his fishing buddy? How do you feel about the mayor voting for no-bid construction contracts for his friend? Contracts that later were found to be overpriced? 4
In Wichita, city council members receive campaign contributions while participating in a quasi-judicial proceeding involving the contributors. This doesn’t seem to be improper to the Wichita Business Journal. But it isn’t alone. The Wichita Eagle doesn’t object to any of this. Well, maybe once in a while it does, but not very strenuously or for very long.
Another problem: Wilson dismisses the claim that Longwell was able to exert much influence over the other six council members in order to benefit a project in his council district. But during the campaign, Longwell eagerly took credit for the good things that the city council did. Though Longwell was but one of seven votes, his commercials made it seem like he performed these deeds all by himself. But when things go wrong, well, he’s just one of seven votes.
The last fallacy Wilson objects to is this: “The idea that a $500 campaign contribution buys a vote, a specious claim by Americans for Prosperity that inexplicably lives on. If a council member’s vote is for sale for $500, their stupidity trumps their corruption. And yet some of these false claims remain in political advertising, despite being debunked by two media outlets — and here.”
A few points: First, it’s not just a $500 contribution. We find many examples of individual $500 contributions from executives of the same company, along with spouses and other family members. The contributions are effectively stacked. Second, sometimes campaigns are funded to a large extent by these stacked contributions from just one or two firms. 5 Third, if these contributions are not seen as valuable to those who make them, why do the same small groups of business interests make the maximum contributions year after year?
As far as the claims being debunked: A few weeks ago I showed you the inexplicably bad reporting from the Wichita Eagle.6 The Business Journal didn’t do any better.
Wilson’s op-ed seems more like an audition for a job at city hall than a critical look at the campaign and its issues. Making a move from news media to a government job in communications is a common career move. There are three former journalists working in Wichita city hall. One former Wichita Eagle reporter went to work for the Wichita school district. There are many examples in Topeka. It’s a problem when journalists who are supposed to be exercising watchdog duty over government agencies end up working for them. We can also recognize when journalists are auditioning for jobs in government.
This report shows us that power of government to influence economic development is weak. GWEDC’s information said these jobs were for the geographical area of Sedgwick County. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2014 was 247,614 persons. So the jobs created by GWEDC’s actions amounted to 0.14 percent of the labor force. This is a vanishingly small fraction. It is statistical noise. Other economic events overwhelm these efforts.
Much of the discussion surrounding school funding in Kansas has centered around base state aid per pupil. It’s the starting point for the Kansas school finance formula, and therefore an important number. But base state aid is not the only important number. 
