Voice For Liberty

Tag: Subsidy

  • Wichita helps out the Ambassador Hotel campaign

    A page on the City of Wichita’s official, taxpayer-funded website provides information on the February 28th special election regarding a guest tax rebate for the Ambassador Hotel in downtown Wichita. While the page provides useful information, it makes a claim that is not accurate, and one which may persuade Wichita voters to vote Yes.

    Specifically, a page on the city’s website states: “Developers would be allowed to collect the rebate for 15 years for costs associated with redeveloping the hotel.”

    An informational sheet also on the city’s website says much the same, claiming that the purpose of the guest tax rebate is to “reimburse them for costs associated with redeveloping the hotel.”

    Many city programs, such as TIF and CID, have specified, allowable uses for the funds provided by these incentive programs. But this guest tax rebate program does not. When the city makes these claims regarding the use of the guest tax, it makes it sound almost benign. Voters might feel persuaded to vote in favor of the rebate program using a reason that doesn’t exist in fact or in contract.

    The guest tax is mentioned on pages 22, 25, 27, 81, 82, 95, and 98 of the agenda packet for the September 13, 2001 city council meeting. The packet includes the actual agreement between the city and the Ambassador Hotel development team.

    None of the references to the guest tax rebate say anything about how the money may be used.

    I asked the city about this, as to whether the city was adding extra meaning to the guest tax rebate that was not specified in the contract between the city and the hotel developers.

    A response from city attorney Gary Rebenstorf disagreed with my contention. Rebenstorf wrote “The explanation you question is a factual statement and accurately reflects the purpose of the rebated taxes to help with costs associated with redeveloping the hotel. The development agreement, which details the development project, provides for the incentive. The guest tax rebates will provide operating cost relief with added cash flow to increase the developer’s capacity to carry more private debt and/or equity and thus cover costs associated with redevelopment of the hotel.”

    But you be the judge. Is the guest tax rebate necessary, and will it be used for the purposes mentioned in city attorney Rebenstorf’s statement?

    There’s no contract that requires the hotel developers to do so.

    Furthermore, the hotel developers have said the hotel will open even if the guest tax rebate measure does not pass in the February 28th election.

    The guest tax measure is more properly viewed as a ninth potential layer of taxpayer-funded government subsidy provided for this hotel. Eight layers are already in place and will not be affected by the outcome of the election.

    It is only the ninth layer that is in question — a ninth layer that is unnecessary, and that goes directly to the developer’s pockets, despite the claims of the city’s attorney.

    I believe there’s a technical business and legal term for that: gravy.

  • Fact checking Wichita Mayor Carl Brewer

    Last week Wichita Mayor Carl Brewer appeared on the KPTS Television public affairs program Impact to discuss his recent State of the City Address for 2012. While the mayor didn’t say much that is factually incorrect, examining some of his statement in a larger context is a valuable exercise.

    Regarding the plans for Southwest Airlines to start service in Wichita, Brewer said: “Our number one goal is to create an environment where people can fly anyplace in the country they want.”

    This is a curious statement by Mayor Brewer for this reason: According to its website, Southwest serves 72 cities. But other carriers that serve Wichita, such as American, United, and Delta, serve hundreds of cities in the U.S. and many more across the world. So Wichitans already have access to many more cities than Southwest serves.

    Regarding the Affordable Airfares program and its subsidy to low-cost carriers, the mayor said the program has created an environment where “we’ve increased travel at the airport.”

    The actual numbers barely support this claim. The chart below, using data from the Bureau of Transportation Statistics, shows the number of passengers at the Wichita Airport on a monthly basis. Since the monthly data varies so much, I’ve included a 12-month moving average line in black.

    Would you say this chart shows “increased travel” as the mayor claimed? Yes, the passenger count has increased since 2003, but in recent years the moving average line is nearly flat, with a few ups and downs. Especially relevant is the period since 2006, when the Affordable Airfares program took affect. In 2005, the average monthly passenger count was 59,565. For the first seven months of 2011, it was 60,736.

    So we can give the mayor credit for this: traffic is up — a little. But when compared to the cost of the subsidy program and the harmful effect on other airlines, I would say the program is less than a model success story.

    Wichita monthly passengers

    There’s another way to look at airport traffic: the number of flights. Figures from the Wichita Airport appear in the chart below. While these figures include only weekday departures, statistics from BTS that include all flights show a similar trend: the number of flights is, and has been, going down. This is an important statistic, as for many people, especially business travelers, the availability of a flight at any cost is more important than low fares for everyone.

    Wichita daily departures

    Mayor Brewer also said “We’ve actually cut $20 million out of the overall budget for the city.” This line of thinking is common among the political class. To them, if spending does not rise as fast as hoped for, it’s a cut. The chart below, however, shows that spending continues to increase, despite the claim of budget cuts.

    Wichita general fund spending

    On economic development, Mayor Brewer said we need to diversify Wichita’s economy, and he promoted wind energy and solar energy as industries that Wichita should diversify into.

    The problem is — besides a few spectacular failures such as Solyndra — these two green energy sources don’t have much of a future, and don’t represent a good plan for Wichita to stake its future on. The False Promise of Green Energy, a new book from the Cato Institute, is described as follows: “Green energy promises an alluring future — more jobs in a cleaner environment. We will enjoy a new economy driven by clean electricity, less pollution, and, of course, the gratitude of generations to come. There’s just one problem: the lack of credible evidence that any of that can occur. The False Promise of Green Energy critically and realistically evaluates the claims of green-energy and green-jobs proponents who argue that we can improve the economy and the environment, almost risk-free, by spending hundreds of billions of taxpayer dollars in return for false or highly speculative promises. … The False Promise of Green Energy illustrates the irresponsibility of attempting to transform modern society with borrowed money, wishful thinking, and bad economics. It shows how the top-down control programs offered by green-energy and green-jobs advocates are unlikely to achieve positive results compared with allowing competitive forces to continue to provide ever greater environmental quality and energy efficiencies.”

    The energy sources Brewer wants Wichita to rely on for its economic future are highly dependent on government subsidy programs for their very existence. U.S. Representative Mike Pompeo of Wichita has introduced legislation to end all tax credits related to energy production, including wind and solar. We should rely on markets instead of government to decide which energy forms are best for the country. Mayor Brewer should not hitch Wichita’s wagon to energy forms that are bound to be losers in the long run, and even in the very near future.

  • For the Ambassador Hotel in Wichita: 8 or 9 government subsidy programs?

    Supporters of a guest tax rebate program for Wichita’s Ambassador Hotel don’t tell you that the vote on February 28th concerns only one of the potential nine taxpayer-funded government subsidy programs for the hotel.

    Voting No on February 28th leaves eight government subsidy programs in place. Only one program is affected.

    Here are the government subsidy eight programs the hotel already has in place that will not be affected by the February 28th election:

    • $3,325,000 in tax increment financing. This diverts money from services like police, fire, and schools to provide benefits to the developers, in this case parking for the hotel.
    • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
    • $3,800,000 in tax credits from the State of Kansas. Taxpayers across Kansas have to make up this missing revenue.
    • $3,500,000 in tax credits from the U.S. government. Taxpayers across the country have to make up this missing revenue.
    • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel. That’s missing revenue that other Kansas taxpayers have to make up.
    • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
    • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
    • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

    All told, this project will receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

    The election on February 28th concerns one additional government subsidy program: $134,000 per year in guest taxes. A special city charter ordinance would allow the hotel to keep 75 percent of the guest tax it collects, instead of that revenue going to the city’s convention and tourism fund. This is the ordinance that is the subject of the February 28th election.

    A vote of No keeps eight government subsidy programs in place. These generous taxpayer-funded programs should be enough.

  • Wichita Ambassador Hotel information sheet

    Tax Fairness for All Wichitans has an information sheet available to help Wichitans learn more about the February 28th election regarding the Ambassador Hotel guest tax rebate.

    You can download a printable pdf version of the information sheet by clicking on Tax Fairness for All Wichitans Information Sheet. Or, view the document below. (Hint: Click on “Fullscreen” at the bottom of the document for a larger view.)

    Tax Fairness for All Wichitans Information Sheet

  • Carl Brewer: State of the City for Wichita, 2012

    Last night Wichita Mayor Carl Brewer delivered his annual State of the City Address. The text of the address may be read at State of the City Address.

    In his speech, Brewer several times criticized those who act on “partisan agendas.” This is quite a remarkable statement for the mayor to make. Partisan usually refers to following a party line or platform. The mayor didn’t mention who he was criticizing, but it’s likely he was referring to myself and others like John Todd, Susan Estes, and Clinton Coen, as we appear regularly before the city council, usually in disagreement with the mayor and his policies.

    What’s remarkable is that the council, even though it has four Republican members, almost always votes uniformly with Democrat Brewer and the other two politically liberal members of the council. The only exception is Michael O’Donnell (district 4, south and southwest Wichita), who is often in a minority of one voting in opposition to the other six. The other Republican members — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — routinely vote in concert with the Democrats and liberals on the council.

    Remarkable also are the many members of the business community who appeal to the council for subsidies, increased government intervention, and more central planning from city hall: many of these are Republicans. Conservative Republicans, many have personally told me.

    This describes a lack of partisanship. Most of the mayor’s critics, such as myself, are more accurately characterized not as acting along party lines, but as acting on their belief in economic freedom, free markets, and limited government.

    Economic development

    The mayor said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context.

    According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This miniscule number is dwarfed by the normal ebb and flow of other economic activity.

    The mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay these costs. This means that economic activity — and jobs — are lost somewhere else in order to pay for the incentives.

    The mayor’s plan going forward, in his words, is “We will incentivize new jobs.” But under the mayor’s leadership, this “active investor” policy has produced a very small number of jobs, year after year. Doubling down on the present course is not likely to do much better.

    But there are those who disagree, despite all evidence to the contrary. Sedgwick County Commissioner Dave Unruh — a conservative Republican, for those keeping track of partisanship — recently called for a “deal-closing” fund of $100 million. A funding source of this magnitude would undoubtedly require a new tax. There are many who feel there should be a new sales tax devoted to economic development and downtown Wichita development. We should not be surprised to see such a proposal emerge, and not be surprised that civic and business institutions will support it.

    The mayor repeatedly said that the city has been “courageous.” In reality, Wichita does about the same as everyone else. But there is a way Wichita could distinguish itself among cities.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, tax increment financing, community improvement district special taxes, and other forms of subsidy. Being an “active investor” has been the approach of the City of Wichita, and according to the mayor’s vision, this plan is to be stepped up in the future.

    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.”

    Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “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.”

    We need business and political leaders in Wichita and Kansas who can see beyond the simplistic imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these — and Mayor Brewer leads in the opposite direction.

    Critical of misinformation campaigns

    In his speech, Brewer was critical of those who “spread misinformation.” He was not specific as to who he’s criticizing, and I wouldn’t expect him to name specific people in a speech like this.

    But when the mayor criticizes people for being uninformed or misinformed, he needs to look first at himself. He and city staff also need to engage their critics and be responsive to requests for information.

    As an example of misinformation, the mayor cited this evidence that city policies are working: “The proposed Ambassador Hotel with a 3-to-1 private to public investment ratio.”

    The city arrived at this ratio by employing a very narrow definition of public investment. When tax credits from the State of Kansas and federal government as well as other sources of public subsidy are accounted for, the ratio drops to less than two to one.

    It’s true that considering only the city’s artificially narrow definition of public funding, the ratio does reach three to one. But Wichitans also have to pay part of the costs of the tax credits and other subsidies.

    The city has also been less than honest in its promotion of the cost-benefit ratio for the Ambassador Hotel project. The city officially cites a cost-benefit study produced by Wichita State University Center for Economic Development and Business Research. Part of that study produced a cost-benefit ratio of 2.63 to one, and that’s what the city uses as justification for its participation in the project.

    But the full story of the costs and benefits of this project are contained in these numbers from the WSU analysis:

                                        ROI   Cost-benefit ratio
City Fiscal Impacts General Fund  163.2%        2.63
City Fiscal Impacts Debt Service  -17.2%        0.83
City Fiscal Impacts                -9.8%        0.90

    WSU evaluated the impact of the Ambassador Hotel on the City of Wichita’s finances in two areas: The impact on the city’s General Fund, and separately on the city’s Debt Service Fund. The two were combined to produce the total fiscal impact, which is the bottom line in this table.

    The City of Wichita cites only the positive impact to the General Fund figure. But the impact on the Debt Service fund is negative, and the impact in total is negative.

    It’s true that the ROI and cost-benefit ratio for the General Fund indicate a positive investment return. But the cost of the Ambassador Hotel subsidy program to the General Fund is $290,895, while the cost to the Debt Service Fund is $7,077,831 — a cost factor 23 times as large.

    Citizens ought to ask: Who is spreading misinformation?

    It is difficult to get a response from city hall regarding questions like these. So far city economic development director Allen Bell has not agreed to meet with representatives of Tax Fairness for All Wichitans, a group opposed to the subsidies for the Ambassador Hotel. (I am part of that group.) The city and its allied economic development groups will not send representatives to participate in a public forum on this matter.

    Simplistic answers

    The mayor criticized those who “provide simplistic answers to very complicated challenges.” He may be — we don’t really know — referring to those like myself who advocate for free market solutions to problems rather than reliance on government. Certainly the mayor believes that government must act — “courageously” he said — to confront our problems.

    A problem with the mayor’s plan for increased economic interventionism by government is the very nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:

    As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

    When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

    Relying on free market solutions for economic growth and prosperity means trusting in the concept of spontaneous order. That takes courage. It requires faith in the values of human freedom and ingenuity rather than government control. It requires that government officials let go rather than grabbing tighter the reins of power.

    Mayor Brewer, five of six city council members, and the city hall bureaucracy do not believe in these values. Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty “simplistic.” Instead, his government prefers crony capitalism and corporate welfare. This is the troubling message that emerges from Brewer’s State of the City address.

  • Kansas Bioscience Authority

    The release of a forensics audit of the Kansas Bioscience Authority coupled with two days of joint committee hearings revealed an independent government agency out of control, an audit that draws conclusions described as sanitized of important details, and an agency and legislative supporters who believe that now, all is well at the KBA.

    Defenders and supporters of KBA rely on two facts: First, the source of many problems — former CEO Tom Thornton — is no longer at KBA. He has been criticized for overspending and his managerial style, and the audit found that he deliberately deleted and scrubbed data from his personal laptop computer. Data is also missing from a protected section of a KBA server.

    Second, the audit finds no major problems with KBA’s board of directors or its business policies, procedures, and controls.

    Regarding Thornton, Kansas Secretary of Agriculture Dale A. Rodman, who oversaw the audit process on behalf of the Brownback Administration, was strongly critical of the KBA board’s oversight of Thornton. He told a joint committee that the KBA board had not done its job, and that a “golden opportunity” for Kansas has been lost.

    As to policies and practices, it is apparent that the KBA board violated a Kansas statute governing the KBA that covers conflicts of interest and board members receiving financial benefits on behalf of companies they have ownership interests in. The audit, many times, says that board members may resolve a conflict of interest by disclosure and not voting.

    But the case of KBA board member Bill Sanford is an example to the contrary. Rodman said that a company he partly owns received KBA grants totaling $674,996. There appear to be many similar examples involving other KBA personnel and companies.

    These facts stand in contrast to conclusions drawn in the audit, which was conducted by BKD, LLP Forensics and Valuation Services on behalf of the KBA, although the Brownback administration, through Rodman, had some oversight. Senate Commerce Committee Chair Susan Wagle, a Wichita Republican who has been at the forefront of the KBA issue, has repeatedly described the audit’s conclusions as “sanitized.” I agree.

    Rodman, in his testimony, revealed a troubling attitude towards ethics that we often see in Kansas. He told the committee that former Governor John Carlin told him that KBA could not do business in Kansas with strict ethic rules because everyone in Kansas knows each other. And last year Carlin, as chairman of the board of KBA, appeared before a Senate committee to give a strong defense of CEO Thornton.

    Now we know differently. But Carlin — defender of Thornton, who is now widely recognized as a “bad apple” — still serves on the KBA board. The fact that there has been little turnover in the composition of the KBA board reveals that the board, along with KBA’s supporters, believe that little is left to be fixed, now that Thornton has left the building.

    Kansans deserve something better, however. If KBA is to continue, all board members should resign, and immediately.

    The audit and committee testimony also uncovered troubling facts about the performance of KBA in creating jobs. If we take away KBA’s largest success story, which accounts for half or more of the jobs KBA claims to be responsible for creating and which cost a small amount of KBA funds, we are left with the realization that the other jobs KBA created cost over $700,000 each.

    KBA defends itself by noting that it focuses on long-term nurturing of the bioscience industry in Kansas, and less on creating jobs in the near term. Long-term goals, however, are not the forte of government, and that may be why KBA was created as an independent agency with its own revenue stream not subject to annual legislative or executive branch appropriations.

    But that leads to another problem: Arrogance and indomitability. That is much in evidence at KBA. Furthermore, we can’t really say that KBA “invests,” as it is not subject to the same constraints that govern when businesses or individuals invest. These private actors can’t conscript their capital from the people of Kansas, as does KBA. Neither does KBA have to accept responsibility for losses.

    It would not be surprising to see legislation emerge to provide legislative or executive branch oversight and control over KBA. While that may improve KBA, we will still be left with the issue of the incompatible roles of government and private sector.

  • End the Economic Development Administration — Now

    Following in an article from U.S. Representative Mike Pompeo, a Republican who represents the Kansas fourth district, including the Wichita metropolitan area. It provides an example of how hard it is to reduce the size of government. The legislation that is mentioned in the article is H.R. 3090: EDA Elimination Act of 2011, which would shut down the Economic Development Administration.

    End the Economic Development Administration — Now

    By U.S. Representative Mike Pompeo
    As part of my efforts to reduce the size of government, I have proposed to eliminate the Economic Development Administration (EDA), a politically motivated federal wealth redistribution agency. Unsurprisingly, the current leader of that agency, Assistant Secretary of Commerce for Economic Development John Fernandez, has taken acute personal interest in my bill to shutter his agency.

    Last week, Secretary Fernandez invited himself to Wichita at taxpayer expense and met with the Wichita Eagle’s editorial board. Afterwards, the paper accurately noted I am advocating eliminating the EDA even though that agency occasionally awards grant money to projects in South Central Kansas. They just don’t get it. Thanks to decades of this flawed “You take yours, I’ll take mine” Washington logic, our nation now faces a crippling $16 trillion national debt.

    I first learned about the EDA when Secretary Fernandez testified in front of my subcommittee that the benefits of EDA projects exceed the costs and cited the absurd example of a $1.4 million award for “infrastructure” that allegedly helped a Minnesota town secure a new $1.6 billion steel mill. As a former CEO, I knew there is no way that a taxpayer subsidy equal to less than one-tenth of one percent (0.1%) of the total capital needed made a difference in launching the project. That mill was getting built whether EDA’s grant came through or not. So, I decided to dig further.

    I discovered that the EDA is a federal agency we can do without. Similar to earmarks that gave us the infamous “Bridge to Nowhere” or the Department of Energy loan guarantee scandal that produced Solyndra, the EDA advances local projects that narrowly benefit a particular company or community. To be sure, the EDA occasionally supports a local project here in Kansas. But it takes our tax money every year for projects in 400-plus other congressional districts, many if not most of which are boondoggles. For example: EDA gave $2 million to help construct UNLV’s Harry Reid Research and Technology Park; $2 million for a “culinary amphitheater,” tasting room, and gift shop at a Washington state winery; and $500,000 to construct (never-completed) replicas of the Great Pyramids in rural Indiana.

    Several times in recent decades, the Government Accountability Office has questioned the value and efficacy of the EDA. Good-government groups like Citizens Against Government Waste have called for dismantling the agency. In addition, eliminating the EDA was listed among the recommendations of President Obama’s own bipartisan Simpson-Bowles Deficit Reduction Commission.

    So why hasn’t it been shut down already? Politics. The EDA spreads taxpayer-funded project money far and wide and attacks congressmen who fail to support EDA grants. Soon after that initial hearing, Secretary Fernandez flew in his regional director — again at taxpayer expense — to show me “all the great things we are doing in your home district” and handed me a list of recent and pending local grants. Hint, hint. You can’t say I wasn’t warned to back off. Indeed, Eagle editors missed the real story here: Secretary Fernandez flew to Wichita because he is a bureaucrat trying to save his high-paying gig. The bureaucracy strikes back when conservatives take on bloated, out-of-control, public spending, so I guess I’m making progress.

    Please don’t misunderstand. I am not faulting cities, universities, or companies for having sought “free” federal money from the EDA. The fault lies squarely with a Washington culture that insists every program is sacred and there is no spending left to cut.

    A federal agency run at the Assistant Secretary level has not been eliminated in decades. Now is the time. My bill to eliminate the EDA (HR 3090) would take one small step toward restoring fiscal sanity and constitutional government.

  • Kansas and Wichita quick takes: Monday January 16, 2012

    Tax cuts = extra income? Commenting on Kansas tax reform, Wichita Business Journal editor Bill Roy said “Certainly for business people, it’s the elimination of the income tax on business income. … They’ll appreciate having that extra income that they can use on other things in their business.” I don’t know how much thought Roy gave to these remarks, but his easy likening of lower taxes to extra income is symptomatic of the problem: We have become accustomed to government having a claim on our income. In the rare instances where government gives up part of that claim, we taxpayers are supposed to view it as a gift, as something extra. Roy’s remarks were broadcast on the KPTS television program Impact while discussing Kansas Governor Sam Brownback’s tax reform plan. … Similar lines of thinking are revealed whenever it is said that tax cuts “cost” the government. The proper way of thinking is that government is a cost to the people, and whenever the cost of government is reduced, we experience a benefit. That is, we the people, as contrasted to the political class. If the government cuts taxes, the government gives us nothing. It simply takes less of what is ours in the first place. … I’m also reminded of former Kansas Governor Kathleen Sebelius, who when commenting on a reduction of the Kansas business machinery tax, said “We’re not giving away money for the sake of giving it away.”

    Revenue-neutral tax reform. If Kansas tax reform is to be revenue-neutral, that — by definition — means that if one person pays less, someone else has to make up the difference. Peter Hancock of Kansas Education Policy Report has such an example in his post Winners and Losers in Brownback’s Tax Plan. A low-income family would experience a tax increase of $442 (mostly through loss of the Earned Income Tax Credit), while a middle class family with business income would save about $300. These examples were released by Kansas Democrats. … Hancock also reports that the Brownback administration’s projections assume 5.9 percent annual growth, instead of the standard 4 percent used by the Consensus Estimating Group. A common criticism of President Barack Obama’s administration is that its projections are based on an overly-optimistic rate of future economic growth. We shouldn’t do the same in Kansas.

    Peterjohn to speak. This Friday (January 20th) the Wichita Pachyderm Club features Sedgwick County Commissioner Karl Peterjohn. He says he will speak on “critical national problems we are facing with a historical perspective.” The public is welcome and encouraged to attend Wichita Pachyderm meetings. For more information click on Wichita Pachyderm Club. Upcoming speakers: On January 27, 2012: The Honorable Jennifer Jones, Administrative Judge, Wichita Municipal Court, speaking on “An overview of the Wichita Municipal Court.”

    Southwest to fly to Wichita. Since it gobbled up AirTran, the question has been: Will Southwest Airlines provide service in Wichita? Now we know the answer is yes. While the airline has recently started service in some markets without the large, ongoing subsidies that Wichita and the state provide, that won’t be the case in Wichita, according to news reports. … Last year I reported on Southwest starting service in Charleston, South Carolina, whose metropolitan area population is similar to that of Wichita: “In the Charleston situation, there evidently won’t be the massive state-supplied subsidy as we have in Kansas. But Southwest will still get a leg up: A USA Today story quotes a Charleston airport official saying ‘Southwest didn’t want a state subsidy, but was interested in the airport’s incentives a temporary waiver of landing fees, up to $10,000 to market new flights, and up to $150,000 for other start-up costs.’” That’s a lot less than what Wichita and Kansas offer. .. Will the need for subsidies last? About this time last year, Wichita City Manager Robert Layton said “The Southwest business model doesn’t require subsidies over a long period of time.” Of course, we were told that the subsidy for AirTran would be required for only a short period, but the program grew and grew until it is now considered part of our state’s transportation infrastructure.

    Kansas economic development incentives. In an Insight Kansas column, Professor Chapman Rackaway of Fort Hays State University concludes: “No state will abandon the tax-incentive recruitment strategy for fear of being the only business suitor with nothing to offer. But the tax-incentive strategy remains a risky one, and perhaps it is time for Kansas and other governments to re-evaluate the practice.” … Earlier in the article he cites the lack of oversight among the states: “States and localities are regularly in competition with one another for scarce jobs. However, a 2001 article in Economic Development Quarterly reported that, despite the billions distributed annually as incentives, states were doing little evaluation of incentives’ effectiveness or their return on investment.” (Kansas has done a little of this; see here. A quote from the Kansas audit: “Most studies of economic development incentives suggest these incentives don’t have a significant impact on economic growth. The literature we reviewed concluded that, thus far, negative and inconclusive findings are far more numerous than positive findings. Most reviews of economic development assistance find few results are achieved — a theme that audits in Kansas and other states commonly find, as well. Findings of ineffectiveness include promised jobs weren’t created, return on investment is low or negative, and incentives offered weren’t a determining factor.” But also: “The literature also suggests that economic development incentives must be offered to remain competitive with other states.”) … But I think there is a way out. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business wrote this regarding “benchmarking” — the bidding wars for large employers that are the subject of Rackaway’s article: “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.”

    Story is broken. “Prof. Art Carden responds to ‘The Story of Broke,’ a recent video by the creators of ‘The Story of Stuff.’ In ‘The Story of Broke,’ Annie Leonard claims that the government isn’t actually broke. Rather, the government just wastes resources on the wrong things like subsidies to the dinosaur economy and war. She claims that the government should change its ways, and instead, subsidize firms that will bring us the future we really want. Art Carden agrees with Leonard that war and subsidies are wasteful, but is skeptical of notion that there is one unified vision for the future. To Carden, everyone has a different vision for the future. Our path to the future, he argues, is determined by the interactions of billions of unique individuals pursuing their own objectives. … Carden concludes that government spending won’t buy a brighter future. A brighter future will emerge when people are allowed to spend money on things they care about. Put another way, positive change will come from billions of people cooperating freely and voluntarily with one another, not from pushing trillions of dollars through a broken political process.” This video is from LearnLiberty.org, a project of Institute for Humane Studies, and many other informative videos are available.

  • 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.

    The latest evidence we have is the construction of a downtown parking garage that benefits Douglas Place, especially the Ambassador Hotel, a renovation of a historic building now underway.

    The flow of tax dollars Wichita city leaders had planned for Douglas Place called for taxpayer funds to be routed to a politically-connected construction firm. And unlike the real world, where developers have an incentive to build economically, the city created incentives for Douglas Place developers to spend lavishly in a parking garage, at no cost to themselves. In fact, the wasteful spending would result in profit for them.

    The original plan for Douglas Place as specified in a letter of intent that the city council voted to support, called for a parking garage and urban park to cost $6,800,000. Details provided at the August 9th meeting of the Wichita City Council gave the cost for the garage alone as $6,000,000. The garage would be paid for by capital improvement program (CIP) funds and tax increment financing (TIF). The CIP is Wichita’s long-term plan for building public infrastructure. TIF is different, as we’ll see in a moment.

    At the August 9th meeting it was also revealed that Key Construction of Wichita would be the contractor for the garage. The city’s plan was that Key would not have to bid for the contract, even though the garage is being paid for with taxpayer funds. Council Member Michael O’Donnell (district 4, south and southwest Wichita) expressed concern about the no-bid contract. As a result, the contract was put out for competitive bid.

    Now a winning bid has been determined, according to sources in city hall, and the amount is nearly $1.3 million less than the council was willing to spend on the garage. This is money that otherwise would have gone into the pockets of Key Construction. Because of the way the garage is being paid for, that money would not have been a cost to Douglas Place’s developers. Instead, it would have been a giant ripoff of Wichita taxpayers. This scheme was approved by Mayor Carl Brewer and all city council members except O’Donnell.

    Even worse, the Douglas Place developers have no incentive to economize on the cost of the garage. In fact, they have incentives to make it cost even more.

    Two paths for developer taxes

    Recall that the garage is being paid for through two means. One is CIP, which is a cost to Wichita taxpayers. It doesn’t cost the Douglas Place developers anything except for their small quotal share of Wichita’s overall tax burden. In exchange for that, they get part of a parking garage paid for.

    But the tax increment financing, or TIF, is different. Under TIF, the increased property taxes that Douglas Place will pay as the project is completed won’t go to fund the general operations of government. Instead, these taxes will go to pay back bonds that the city will issue to pay for part of the garage — a garage that benefits Douglas Place, and one that would not be built but for the Douglas Place plans.

    Under TIF, the more the parking garage costs, the more Douglas Place property taxes are funneled back to it — taxes, remember, it has to pay anyway. (Since Douglas Place won’t own the garage, it doesn’t have to pay taxes on the value of the garage, so it’s not concerned about the taxable value of the garage increasing its tax bill.)

    Most people and businesses have their property taxes go towards paying for public services like police protection, firemen, and schools. But TIF allows these property taxes to be used for a developer’s exclusive benefit. That leads to distortions.

    Why would Douglas Place be interested in an expensive parking garage? Here are two reasons:

    First, the more the garage costs, the more the hotel benefits from a fancier and nicer garage for its guests to park in. Remember, since the garage is paid for by property taxes on the hotel — taxes Douglas Place must pay in any case — there’s an incentive for the hotel to see these taxes used for its own benefit rather than used to pay for firemen, police officers, and schools.

    Second, consider Key Construction, the planned builder of the garage under a no-bid contract. The more expensive the garage, the higher the profit for Key.

    Now add in the fact that one of the partners in the Douglas Place project is a business entity known as Summit Holdings LLC, which is composed of David Wells, Kenneth Wells, Richard McCafferty, John Walker Jr., and Larry Gourley. All of these people are either owners of Key Construction or its executives. The more the garage costs, the higher the profit for these people. Remember, they’re not paying for the garage. City taxpayers are.

    The sum of all this is a mechanism to funnel taxpayer funds, via tax increment financing, to Key Construction. The more the garage costs, the better for Douglas Place and Key Construction — and the worse for Wichita taxpayers.

    Fueled by campaign contributions?

    It’s no wonder Key Construction principals contributed $16,500 to Wichita Mayor Carl Brewer and five city council members during their most recent campaigns. Council Member Jeff Longwell (district 5, west and northwest Wichita) alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.

    This scheme — of which few people must be aware as it has not been reported anywhere but here — is a reason why Wichita and Kansas need pay-to-play laws. These laws impose restrictions on the activities of elected officials and the awarding of contracts.

    An example is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”

    This project also shows why complicated financing schemes like tax increment financing need to be eliminated. Government intervention schemes like this turn the usual economic incentives upside down, and at taxpayer expense.