Voice For Liberty

Tag: Subsidy

  • Tax increment financing district (TIF) resources

    Resources on tax increment financing (TIF) districts. An updated version of this article is here.

    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.

    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.

    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.

    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.

  • Flight options from Wichita decline, compared to nation

    A program designed to bring low air fares to Wichita appears to meet that goal, but the unintended and inevitable consequences of the program are not being recognized.

    The legislative agendas for Wichita and Sedgwick County call for supporting the retention and funding of the Affordable Airfares program. This program provides taxpayer money to subsidize low-cost air carriers in Kansas. Most of the program’s funds have been spent in Wichita, in particular on AirTran Airways.

    According to Regional Economic Area Partnership, the managing organization, the goal of the program is “to provide more air flight options, more competition for air travel, and affordable airfares for Kansas.”

    Is the Affordable Airfares program meeting its goals? If we look at “air flight options,” and if we consider the number of monthly departing flights as a measurement, Wichita isn’t doing well compared to the nation. The chart at the end of this article illustrates.

    (Since this data is highly seasonal, I present a 12-month moving average, so that each point plotted is the average of the previous 12 months data. Also, I index January 2000 to 100.)

    Of particular note is that over the past two or three years, the trend of flights nationally is level, while the trend of flights available in Wichita is declining.

    In its Kansas Affordable Airfares Program Fiscal Year 2011 Report, REAP addresses the goal of “more air flight options” and reports:

    “Air service through Wichita Mid-Continent Airport addresses the statutory objective of more flight options, as follows: A total of 11 airlines provide service from Wichita to seven nonstop destinations with connecting service and four nonstop destinations with no connecting service. Overall, there are on average 38 daily (with 40 on weekdays) nonstop or one-stop flights by commercial air carriers, providing access to 4,989 U.S. and international destinations.”

    This statement simply addresses the current situation. But the goal is more flight options. Which is better evidence of meeting the statutory goal: A simple recitation of what’s available today, or looking at the trend, especially comparing Wichita to the nation? REAP’s statement provides very little information as to whether the program is meeting its stated goals, or whether the program is desirable. We should ask that REAP recognize the data and its implications.

    This trend is an example of unintended consequences of government intervention and regulation. The Affordable Airfares program imposes a rough form of price control on airfares in Wichita. If the program didn’t do that — and it appears it succeeds at this goal — then there would be no point in having the program.

    The inevitable effect of price controls is that less is supplied, compared to what would have been supplied. This economic phenomenon is reliable and predictable.

    While travelers prefer low air fares to high, this is not the only consideration. For those who need to travel on short notice, the availability of flights is very important.

    For more about flights in Wichita, see In Wichita, confusion over air traffic statistics.

    Monthly flights, Wichita Airport and nationally.

  • In Wichita, confusion over air traffic statistics

    As the governments of Wichita and Sedgwick County prepare their legislative agendas for next year, retaining the Affordable Airfares program is a high priority for most officials. This program provides taxpayer money to subsidize low-cost air carriers in Kansas. Most of the program’s funds have been spent in Wichita, in particular on AirTran Airways.

    It’s almost certain that air fares are lower now in Wichita than they might be if not for the Affordable Airfares program. But another goal of the program is not being met. That goal is to increase the flight options from Wichita. This number has been declining for many years, but local officials seem reluctant to acknowledge this. A report produced last year by Kansas Legislative Division of Post Audit, while containing many useful findings, muddies the water in a way that makes it difficult to see the trends at the Wichita airport.

    Here’s an example: Sedgwick County’s 2012 legislative platform states “The Post Audit report also concluded that ‘the program appears to have the desired effect … fares have decreased while passengers and flights have increased.’”

    In the chart provided in the LPA document, there mare many years where the “percent change in flights from prior year” is zero or negative. That means that for that year, the number of flights declined.

    In the chart (below) titled “Monthly Departures, Wichita” we see the number of flights leaving Wichita each month since 2000. (I gathered this data from the same source as did LPA, but independently.) I draw a trend line starting in 2000. That line barely slopes upwards, supporting a claim that “flights have increased.”

    But suppose we start the trend line on January 1, 2003, about seven months after AirTran entered the Wichita market. In this case, the trend line slopes downwards, and rather sharply. Which of the two lines best represents the performance of the Affordable Airfares program? I would contend it is the second line, as it shows what has been happening for the past nine or so years: Flight options from Wichita are declining.

    Considering passengers, shown in the chart titled “Monthly Passengers, Wichita and U.S.”: If we take as a starting point any time from 2000 to 2002, the number of passengers is higher now than then. But since 2004 the trend for Wichita passengers is pretty flat. (Since the monthly passenger data is highly seasonal, I present a 12-month moving average, so that each point plotted is the average of the previous 12 months data.)

    Comparing Wichita to national data, we can see that for the past two years the national trend is slowly rising, while Wichita’s trend is flat. The gap between national and Wichita is increasing, although slowly. This means that Wichita passenger traffic is not keeping pace with national.

    In presentations made as part of the Wichita/Sedgwick County Community Investment Plan attendees are told: “Fares have decreased (24 % overall) while passengers (23% increase) and flights have increased.”

    You have to make a selective — and I would say tortured — reading of the data for this statement to make sense and be true. The survey administered to program participants, at least in draft form, holds similar errors.

    Is the number of flights important? To the business traveler — who often must make travel arrangements on short notice — it is. An available seat on an airplane, even if the fare is high, is the primary concern.

    Other facts regarding the Affordable Airfares program are muddy too. The LPA report from February 2011 is Affordable Airfares: Reviewing the Benefits Claimed As a Result of State Funding to Lower Airfares. In its “Answer in Brief” the audit states: “Overall, the program appears to have had the desired effect. Since Wichita’s original affordable airfare program (FairFares) began in 2002, fares have decreased, while the number of passengers and the number of available flights have increased. However, the Regional Economic Area Partnership’s (REAP) annual reports on the program contain numerous inconsistencies and inaccuracies. Further, the economic impact of the program has been significantly overstated. Specifically, the estimated number of jobs created and the State’s return on investment were overstated because of key methodological errors and the use of some inaccurate data. We also found that overall accountability for the State funds is lacking.”

    Specifically, some of the problems LPA found were:

    • REAP officials don’t use the best data available on fares and the number of passengers.
    • The baseline years and industry benchmarks REAP officials use for comparisons are inconsistent from year to year, and sometimes even within the same report.
    • REAP officials omitted data on the number of flights available to passengers — a key goal of the program — from all but one of the annual reports.
    • The annual financial reports contain numerous errors and inconsistencies.
    • The general approach to estimating the number of jobs created appears reasonable, but the actual estimate includes some key methodological errors and uses some inaccurate data. … As a result, the 2008 study’s estimate of more than 9,700 average annual jobs from AirTran entering the Wichita market is significantly overstated. … The calculated return on investment to the State is also significantly overstated.
    • Overall accountability for state funds is lacking.
    • There is a perception among some people in the State that REAP isn’t sufficiently independent to administer the State Affordable Airfares Fund.

    Thea actions of Wichita and Sedgwick County officials show that they are either uninformed regarding these issues, or that they simply don’t care.

    Monthly departures from the Wichita Airport.
    Monthly passengers, Wichita Airport and nationally.

  • Mixed message on Southwest subsidies

    Now that Southwest Airlines has announced that it will offer service in Wichita, the question is this: Will Southwest tap the subsidy?

    Last year city manager Bob Layton said he feels “pretty good” about Wichita’s chances in receiving service from the popular discount airline. He said that we need to keep the Affordable Airfares Program to keep Southwest interested in Wichita. But later he said “The Southwest business model doesn’t require subsidies over a long period of time.”

    A mixed message.

    From the Wichita Eagle: “[Southwest vice president for airport affairs Bob] Montgomery said Southwest may initially utilize Affordable Airfares revenue to mitigate ‘risk’ but hopes to grow its business so the public subsidies aren’t needed.”

    Mixed.

    “[Kansas Governor Sam] Brownback also committed during the news conference to recommending the extension of Affordable Airfares during the 2013 legislative session, calling its potential role helping defray Southwest’s risk entering the Wichita market appropriate. ‘The program is doing what we want,’ the governor said. ‘It’s a good program, and I’m going to propose continuing it.’”

    Mixed message again. Especially so for a governor who is being praised for his free market beliefs. Or, as in Forbes: “Sam Brownback is a dazzlingly Reaganesque success as governor of Kansas.”

    The Southwest executive again: “But Montgomery said the fate of Affordable Airfares will have no bearing on Southwest’s future in Wichita. ‘We are here with no conditions, no demands,’ he said. ‘We ask that y’all fly Southwest, because this is a tough business.’”

    Mixed.

    Southwest has started service in cities comparable to Wichita without government subsidy or with only small levels of assistance. Let’s hope our city and state leaders can do the same.

  • Wichita should reject Bowllagio TIF district

    Update: Video of some testimony from the meeting is here.

    This week the Wichita City Council will consider more economic development through the creation of a tax increment financing (TIF) district. For the good of the city, the council should reject this proposal.

    Supporters of TIF — besides the obvious motivations of the developers who are directly enriched by them — point to the jobs and development that they say TIF creates. But there’s plenty of evidence to the contrary, on both jobs and development. Supporters also say TIF has no cost, which, if true, calls into question the entire justification for taxation. This matter also — again — illustrates the need for pay-to-play laws, as some council members will be voting whether to directly enrich their campaign contributors.

    The city documents for this proposal are at Wichita Public Hearing on the Establishment of the Maize 54 Redevelopment District (Tax Increment Financing).

    Effect of TIF on development

    As far as increased development: Yes, that generally happens within the TIF district. But what about the overall city? The answer is that TIF is harmful. Richard F. Dye and David F. Merriman have studied tax increment financing extensively. Their paper The Effects of Tax Increment Financing on Economic Development bluntly states the overall impact of TIF: “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not.”

    Later in the same paper the authors conclude: “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.”

    Summarizing, the authors write:

    In summary, the empirical evidence suggests that TIF adoption has a real cost for municipal growth rates. Municipalities that elect to adopt TIF stimulate the growth of blighted areas at the expense of the larger town. We doubt that most municipal decision-makers are aware of this tradeoff or that they would willingly sacrifice significant municipal growth to create TIF districts. Our results present an opportunity to ponder the issue of whether, and how much, overall municipal growth should be sacrificed to encourage the development of blighted areas.

    In their later article Tax Increment Financing: A Tool for Local Economic Development, Dye and Merriman further explain the results of their research:

    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 TIFs are good for the favored development that receives the subsidy — not a surprising finding. It’s what elected officials, bureaucrats, and newspaper editorial writers can see and focus on. But 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)

    So if we are concerned about overall growth in Wichita, we need to realize that TIF simply shifts development from one place to another. The overall impact, according to uncontroverted research, is negative: less growth, not more.

    TIF and jobs

    When justifying the use of tax increment financing (TIF districts) elected officials, bureaucrats, and newspaper editorial writers often point to the jobs that will be created. Indeed, when a TIF district is created, economic activity usually happens within the district, and it’s easy to observe people working at jobs.

    But when deciding whether TIF is a wise economic development policy, we need to look beyond the boundaries of the TIF district and look at the effect on the entire economy of the city or region.

    One person who has done this is Paul F. Byrne of Washburn University. He authored a recent report titled Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. In its abstract we find this conclusion regarding the impact of TIF on jobs:

    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. (emphasis added)

    While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. When looking at the entire picture, the effect on employment of tax increment financing used for retail development is negative.

    We must conclude that TIF does not meet the goals of increased development and/or jobs, if we consider the impact on everyone. What we’re left with is the well-known problem that public choice economics — the economics of politics — has described: Concentrated benefits and dispersed costs. It’s the reason why those who seek enrichment at Wichita City Hall and other governments make so many political campaign contributions.

    TIF is not free money

    Supporters of TIF usually contend that TIF has no cost. This is not the case. This new development will consume fire, police, and other governmental services, but will not contribute its share of property taxes to pay for these. Instead, some portion of the property taxes will be redirected back to the TIF district to benefit the developers. Others will have to pay taxes to make up this deficit, or will have to accept a reduced level of service. See Tax increment financing is not free money.

    There’s also the “but-for” argument: without the benefit of TIF, the project will not be built, and therefore no tax revenue would be received. It’s a powerful argument, if it were really true. But those who seek this type of government funding can always find a way to make their financial projections “prove” the need for TIF money. Governments then take them at their word.

    We might ask ourselves this question: If TIF is truly without cost, why not have more TIF districts? Why not offer TIF for all new development?

    Maxwell, in particular

    We also need to look at the characteristics of this applicant. The Wichita Business Journal reported this regarding a company Maxwell owned:

    Pixius proposes to repay, over a 10-year period, $1.3 million of a $6.4 million loan from the U.S. Department of Agriculture’s Rural Utilities Service, according to court documents. The loan was part of a 2002 Farm Bill pilot program that loaned more than $180 million to ISPs to expand Internet service to rural areas.

    “To my memory … Pixius is the only one (to receive a loan) that’s had to file bankruptcy to work out of its situation,” says Claiborn Crain, USDA spokesman.

    When the government helped out Maxwell in the past, it cost taxpayers $5.1 million in a loan discharged in bankruptcy. His company is set apart from other similar companies in that, according to the USDA spokesman, only Maxwell’s declared bankruptcy.

    I suggest that Maxwell has had his turn at the government funding trough. Taxpayers can’t afford to give him another.

    Wichita Public Hearing on the Establishment of the Maize 54 Redevelopment District (TaxIncrement Financing)

  • Nation can no longer afford wind tax credit

    From The Hill:

    Sen. Lamar Alexander (R-Tenn.) on Wednesday said the nation’s fiscal situation has become so dire that the government can no longer afford to maintain a wind power production credit that has been in place since in 1992.

    “I think there is certainly the largest realization that we’ve ever had that it’s time for it to end,” Alexander said at a Wednesday event hosted by The Hill and sponsored by the American Energy Alliance.

    In a longer story, The Hill reports on the efforts of U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties) to end the wind production tax credit:

    Rep. Mike Pompeo (R-Kan.) said he hopes that conversation leads to the elimination of all energy subsidies.

    Pompeo has led the House charge against the credit. He got 46 other House GOP members to sign a September letter urging Boehner to nix the provision.

    Pompeo said the wind credit’s history is instructive when debating the benefits of tax carve-outs for specific industries.

    He pointed to a steep decline in wind turbine installations when the credit last lapsed in 2004 as proof that subsidies distort markets and investment. And planned projects and investments already are down for next year as a result of the credit’s cloudy future.

    “I think that’s further evidence that it’s non-economic,” Pompeo said.

    Pompeo has been at the forefront of efforts to end subsidies that distort energy markets. He and Alexander recently contributed an op-ed to the Wall Street Journal, which may be read at Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away. Pompeo also develops the argument in Governor Romney is right: End the wind production tax credit and Mike Pompeo: We need capitalism, not cronyism. The special interests that benefit from cronyism have struck back, but unsuccessfully: Kerr’s attacks on Pompeo’s energy policies fall short.

  • Capitalism and business: The same thing?

    Is “capitalism” and “business” the same thing? Most people would probably answer yes, but that’s a mistake.

    In a video from LearnLiberty.org, a project of Institute for Humane Studies, Professor Steve Horwitz explains the difference: “He refutes the often recited claim that ‘What is good for General Motors is good for America’ by explaining that pro-business legislation encourages behavior that is not beneficial to society or the business itself. He suggests that, in a free market, factors such as profit and competition encourage behavior that ultimately benefits society. Professor Horwitz illustrates that pro-business legislation restricts progress and therefore caters to the interests of industry rather than to consumers, whereas ‘supporters of free markets are ultimately pro-human and pro-people because it is through markets that we get the most innovation and we get the most goods and the cheapest prices.’”

    Still, you may be asking: Isn’t business and free-market capitalism the same thing? Here’s what Milton Friedman had to say: “There’s a widespread belief and common conception that somehow or other business and economics are the same, that those people who are in favor of a free market are also in favor of everything that big business does. And those of us who have defended a free market have, over a long period of time, become accustomed to being called apologists for big business. But nothing could be farther from the truth. There’s a real distinction between being in favor of free markets and being in favor of whatever business does.” (emphasis added.)

    Friedman also knew very well of the discipline of free markets and how business will try to avoid it: “The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.”

    We see this confusion daily in Wichita and Kansas. Many members of the Wichita City Council — Democrats and Republicans — hold pro-business views. But the cronyism — the continual creation of subsidies, preferential treatment, no-bid contracts, and general intervention into the economy — destroys capitalism.

    What about the local chamber of commerce? Isn’t it a bastion of capitalism? Here’s Stephen Moore: “In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper.” (Local chambers of commerce: tax machines in disguise.)

    This accurately describes the Wichita Metro Chamber of Commerce. Earlier this year it decided that eight government subsidy programs supporting the Ambassador Hotel were not enough: The Chamber said there must be a ninth.

    Fortunately, the Kansas Chamber of Commerce does a much better job supporting capitalism and free market principles.

    At the state government level we also have to be watchful, even though we have a conservative governor and legislature (sort of). Earlier this year Kansas Governor Sam Brownback supported extending the STAR bonds program, thereby giving life support to cronyism for another five years. Kansas STAR bonds vote a test for capitalism. A majority of legislators supported him. Other anti-capitalist programs have been started or expanded at his initiative.

  • Wichita waltzing waters dedication a chance to reflect

    This week there will be two dedication ceremonies for the “Waltzing Waters” display at Wichita’s WaterWalk. One is an invitation-only affair for VIPs, while the other is open to the public. While these events are promoted as celebrations, we might use this opportunity to review the history and impact of this project that has absorbed many millions of taxpayer subsidy with few results.

    In 2009 a Wichita Eagle editorial started with this: “Seven years into a project that was supposed to give Wichita a grand gathering place full of shops, restaurants and night spots as well as offices and condos, some City Council members and citizens remain skeptical at best about WaterWalk’s ability to deliver on its big promises. … True, the skepticism to date is richly deserved.”

    The editorial went on to report that public investment in this project has risen to $41 million.

    In any case, there’s little to show for this investment. Even the proposal for the redevelopment of downtown Wichita from the planning firm Goody Clancy realizes that WaterWalk is a failure:

    Indeed, Water Walk might be struggling to fill its space because it has, simply put, hit a ceiling: it is focusing on food and fun, and perhaps there is room for only one such district (Old Town) in Downtown Wichita. The Arena could help in this regard, but until the publicly subsidized Water Walk is a rousing success, it might not make sense to split the pie still further.

    After all the public money put into WaterWalk, in order to get anything else, we’ll probably have to give even more. In 2010, in order to build a Marriott Fairfield Inn and Suites Hotel at WaterWalk, several subsidies were used, including a $2.5 million cash contribution from the City of Wichita. See Waterwalk hotel deal breaks new ground for Wichita subsidies. Will anything else be built at WaterWalk without similar consideration?

    So taxpayers deserve a break and a celebration. Finally, the fountains, purchased in 2008 for $1.6 million, will be working. The entire fountains project cost $3.5 million, says a Wichita city document.

    Waltzing Waters VIP invitation. Click here for a larger version.

    But do VIPs deserve a special celebration? With drinks and hors d’oeuvres, with a desert bar after? Many of these VIPs will be the elected officials and bureaucrats responsible for WaterWalk, a project emblematic of the failure of government planning. Others will be the beneficiaries of Wichita taxpayer subsidies. They should be apologetic, not celebratory. Hopefully the expenses of this event will be borne privately, and not by taxpayers. But that brings up another issue: the pay-to-play environment that exists in Wichita.

    With this glaring example of failure of a public-private partnership staring right at us in downtown Wichita, why do we want to plan for more of this? Shouldn’t we at least wait until WaterWalk is finished (if that ever happens) before we go down the path of throwing more public investment into the hands of subsidy-seeking developers?

    At minimum, we ought to insist that the developers of the WaterWalk project be excluded from any consideration for further taxpayer subsidy. The WaterWalk development team: Dave Burk, Marketplace Properties, LLC; Jack P. DeBoer, Consolidated Holdings, Inc.; Gregory H. Kossover, Consolidated Holdings, Inc.; David E. Wells, Key Construction, Inc.; and Tom Johnson, CRE, WaterWalk LLC need to recognize their failure and the tremendous amount they have cost the Wichita taxpayer. Some of these parties are no longer involved in WaterWalk, but they harm they caused lingers. Some of these parties have received millions in subsidies from the city since then, including a no-bid construction contract awarded to Key Construction. When that contract was put out to public bid, city taxpayers saved $1.3 million on a $6 million project. See No-bid contracts a problem in Wichita.

    Some received a no-interest and low-interest loan from the city to prop up a failing TIF district, and Burk appealed property valuations in a way that caused a tax increment financing district to fall behind.

    The Wichita Eagle reported: “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. … 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.”

    In a later story the Eagle reported “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. Now, taxpayers could be on the hook for $190,000 that had been projected to have come from within the cinema district.”

    Wichita taxpayers should be relieved that at least they’re finally getting something for their investment. Let’s use this time, however, to learn the lessons of WaterWalk and centralized government planning.

  • Koch articles draw critics, but few factual

    Two large articles in the Wichita Eagle regarding Charles and David Koch of Wichita-based Koch Industries have attracted many comments, and many are not based on facts.

    The two articles are The Kochs’ quest to save America and Charles Koch relentless in pursuing his goals.

    A curious irony is the claim by many comment writers that Charles and David Koch want to buy America, while at the same time they are running it into the ground: “The koch bros. are funding the conversion of OUR COUNTRY into another third world country.”

    Even if it was possible to buy America — whatever that means — why would someone destroy it first?

    Another common thread in the comments is that Charles and David Koch didn’t complain about government spending, subsidy, regulation, etc. before President Barack Obama was elected. In fact, they have been working to promote free markets and economic freedom for many decades. Charles Koch and two others founded what became the Cato Institute in 1974, nearly four decades ago. Even earlier: A recent issue of Koch Industries Discovery newsletter contains a story titled “Don’t subsidize me.” Here’s an excerpt:

    When Charles Koch was in his 20s, he attended a business function hosted by his father. At that event, Fred Koch introduced Charles to a local oilman.

    When the independent oilman politely asked about the young man’s interests, Charles began talking about all he was doing to promote economic freedom.

    “Wow!” said the oilman, who was so impressed he wanted to introduce the young bachelor to his eligible daughter.

    But when Charles mentioned he was in favor of eliminating the government’s oil import quota, which subsidized domestic producers, the oilman exploded in rage.

    “Your father ought to lock you in a cell!” he yelled, jabbing his finger into Charles’ chest. “You’re worse than a Communist!”

    It seems the oilman was all for the concept of free markets — unless it meant he had to compete on equal terms.

    Under oath

    For more than 50 years, Charles Koch has consistently promoted economic freedom, even when it was not in the company’s immediate financial interest.

    In the 1960s, Koch was willing to testify before a powerful Congressional committee that he was against the oil import quota — a very popular political measure at the time.

    “I think it’s fair to say my audience was less than receptive,” recalls Koch.

    Years later, Koch warned an independent energy association about the dangers of subsidies and mandates.

    “We avoid the short-run temptation to impose regulatory burdens on competitors. We don’t lobby for subsidies that penalize taxpayers for our benefit.

    “This is our philosophy because we believe this will produce the most favorable conditions in the long run,” Koch said.

    Many comments take the company to task for accepting oil and ethanol subsidies. Koch Industries, as a refiner of oil, blends ethanol with the gasoline it produces in order to meet federal mandates that require ethanol usage. Even though Koch opposed subsidies for ethanol — as it opposes all subsidies — Koch accepted the subsidies. A company newsletter explained “Once a law is enacted, we are not going to place our company and our employees at a competitive disadvantage by not participating in programs that are available to our competitors.” (The tax credit subsidy program for ethanol has ended, but there is still the mandate for its use in gasoline.)

    Regarding oil subsidies, the programs that are most commonly cited (percentage depletion and expensing of intangible drilling costs) apply to producers of oil — the companies that drill holes and pump up oil. Koch Industries doesn’t do that. The company doesn’t benefit from these programs.

    Other comments charge that Koch Industries wants to end regulation so that it can pollute as much as it wants. This is another ridiculous charge not based on facts.

    A statement on the KochFacts website states “recent critics have also claimed that Koch is one of the nation’s top 10 polluters. This study confuses pollution with permitted emissions, which are carefully regulated by the U.S. EPA and other agencies. The index labels as ‘polluters’ Ford Motor, General Motors, GE, Pfizer, Eastman Kodak, Sony, Honeywell, Berkshire Hathaway, Kimberly Clark, Anheuser Busch and Goodyear — corporations, like Koch companies, with significant manufacturing in the U.S. Emissions, a necessary by-product of manufacturing, are strictly monitored and legally permitted by federal, state and local governments.”

    Say: Didn’t the U.S. government take over General Motors, and continues to hold a large stake in the company? And GE and Berkshire Hathaway: Aren’t those run by personal friends of Barack Obama?

    The reality is that manufacturing has become much more efficient with regards to emissions, and Koch Industries companies have lead the way. One report from the company illustrates such progress: “Over the last three years, Koch Carbon has spent $10 million to enhance environmental performance, including $5 million for dust abatement at one of its petroleum coke handling facilities. These investments have paid off. In 2008, Koch Carbon’s reportable emissions were 6.5 percent less than in 2000, while throughput increased 10.4 percent.”

    Even when Koch Industries does not agree with the need for specific regulations, the company, nonetheless, complies. Writing about an increase in regulation in the 2007 book The Science of Success: How Market-Based Management Built the World’s Largest Private Company, Charles Koch explained the importance of regulatory compliance: “This reality required is to make a cultural change. We needed to be uncompromising, to expect 100 percent of our employees to comply 100 percent of the time with complex and ever-changing government mandates. Striving to comply with every law does not mean agreeing with every law. But, even when faced with laws we think are counter-productive, we must first comply. Only then, from a credible position, can we enter into a dialogue with regulatory agencies to determine alternatives that are more beneficial. If these efforts fail, we can then join with others in using education and/or political efforts to change the law.”

    Koch companies have taken leadership roles in environmental compliance, explains another KochFacts page: “In 2000, EPA recognized Koch Petroleum Group for being ‘the first petroleum company to step forward’ to reach a comprehensive Clean Air Act agreement involving EPA and state regulatory agencies in Minnesota and Texas. Despite fundamental policy disagreements, then-EPA Administrator Carol Browner acknowledged Koch’s cooperation. She characterized the agreement as ‘innovative and comprehensive’ and praised the ‘unprecedented cooperation’ of Koch in stepping forward ahead of its industry peers.” Browner was no friend of industry, and had a “record as a strict enforcer of environmental laws during the Clinton years,” according to the New York Times.

    What may really gall liberals and Koch critics is this: They believe that a powerful and expansive government is good for the country. But what we have is a complicated machine that a company like General Electric can exploit for huge profits, all without creating things that consumers value. Charles Koch calls for an end to this, as he wrote last year in the Wall Street Journal: “Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay. Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

    The political Left just can’t believe that anyone would write that and really mean it.