Voice For Liberty

Tag: Subsidy

  • Era of energy subsidies is over

    By U.S. Representatives Mike Pompeo of Kansas and Raul Labrador of Idaho, both Republicans. This is the original editorial. A version appeared in the Washington Times.

    I’m afraid that the title of this op-ed is optimistic. As the authors note, “handouts are hard to give up.” But that’s no reason why we shouldn’t try to eliminate this type of harmful government spending. Pompeo has also introduced H.R. 3090: EDA Elimination Act of 2011 to shut down the Economic Development Administration, another source of wasteful government spending on economic development and business.

    The Era of Energy Subsidies is Over

    By Mike Pompeo and Raul Labrador

    Bill Clinton famously said that “the era of big government is over.” Well, it didn’t work out that way. But something truly remarkable is happening in our national conversation about energy subsidies: outrage, mounting opposition, and, we hope, a swift end. This would be great news for taxpayers and for consumers.

    Subsidy folly has been bipartisan and commonplace. For the past three decades, both parties have intervened in the energy industry. In 1978, a Democrat-controlled Congress and President Jimmy Carter created an Investment Tax Credit for solar, wind and other renewable energy sources. In 1992, a Democrat-controlled Congress and Republican President George H.W. Bush passed the Production Tax Credit for electricity produced from wind and biomass. Then in 2005, a Republican-controlled Congress and President George W. Bush passed the Energy Policy Act of 2005, which included massive tax subsidies for seemingly every energy source under the sun, including alternative vehicles, advanced nuclear power, and of course solar. The latter legislation created the infamous Department of Energy loan guarantee programs that have produced the ongoing Solyndra scandal.

    After three decades, what have we learned? 1) Energy subsidies distort the free market by funneling billions in taxpayer dollars to politically favored energy sources and technologies, preventing market prices from signaling the optimal source for particular energy uses, 2) Subsidizing energy sectors drains the federal fisc and forces the consumption of higher-cost energy sources, 3) Politically allocated capital typically flows to politically connected companies or to large companies that could develop innovative technologies on their own dime. The $535 million Solyndra scandal has reinforced all of these lessons and helped shine a light on the energy subsidy debate, exposing those who maintain government is the solution to our energy needs.

    The good news is, with the support of the American people, politicians are now speaking the truth. At a recent Republican presidential forum, the candidates were in near-unanimous agreement that it is time to end the federal government’s role and allow the free market to bring our nation the next great energy source. Governor Rick Perry said, “I do not think it is the federal government’s business to be picking winners and losers, frankly, in any of our energy sources.” Congresswoman Michelle Bachman had similar remarks: “I want to see a [level] federal playing field. We’ve seen what a disaster it is when the federal government picks winners and losers.” In his economic plan, Governor Mitt Romney said that government “should not be in the business of steering investment toward particular politically favored approaches.” This is progress. Just four years ago almost every candidate in Iowa was afraid to say that subsidizing politically favored energy technologies has been an enormous policy failure.

    Given the shift in the debate, the time is now to end subsidies. This month we introduced the Energy Freedom and Economic Prosperity Act, H.R. 3308, which has garnered support from such conservative organizations as Americans for Prosperity, Americans for Tax Reform, The Club for Growth, The Council for Citizens Against Government Waste, Freedom Action, Heritage Action for America, National Taxpayers Union, and Taxpayers for Common Sense. H.R. 3308 eliminates all energy tax credits, each of which is nothing more than a taxpayer handout to politically favored industries or companies. From solar to wind, from geothermal to biomass and from ethanol to hydrogen, they must all go. It is equal opportunity — not one single solitary tax credit survives this bill. The proposal will then use the savings realized from the repeal of these tax credits to lower the corporate tax rate. This is a perfect model for tax reform — close out politically allocated tax favors and loopholes and lower taxes on every business that competes in America.

    While we are gaining broad public support to end these energy tax credits, the takers of government largesse seldom go quietly. The pro-subsidy lobby pushes to extend its giveaway from Uncle Sam — seeking to extend the production tax credit subsidies for wind, biomass and geothermal every four years. This is the umpteenth-and-never-final request for “just four more years.” But a few more years will just lead to a few more years after that. Even before we introduced the legislation that for the first time provides zero tax credits to any energy source, the American Wind Energy Association howled that Congressman Pompeo “seems to misunderstand how a key federal tax incentive has built a thriving American wind manufacturing sector and tens of thousands of American jobs.” Well, we both understand perfectly — handouts are hard to give up.

    After three decades, the tide on energy subsidies has turned. Our nation has squandered hundreds of billions of dollars with these tax credits and has little to show for it. We hold no ill will to any of these energy sources that currently receive tax credits — some or all of them may well become the next great American energy technology. But having dozens of energy handouts leads companies to spend resources lobbying Washington, D.C. rather than tinkering in their garages and labs. Indeed, we are counting on one of these alternatives to succeed. We just know that we have no idea — nor do any of our peers in Congress — which one consumers will ultimately demand. The winner must be determined the old-fashioned way: hard work, innovation, American moxie and superior skills engaged in competition.

    Let’s put a different twist on the old saying “not invented here” by acknowledging that energy technology never has been invented here, on the Potomac, and do away with energy subsidies once and for all.

  • Kansas and Wichita quick takes: Wednesday November 23, 2011

    Standing up for fundamental liberties. A particularly troubling objection that those who advocate for liberty face is that we want to deny freedom and liberty to others — as if the quantity of liberty is fixed, and I can have more only if you have less. This is the type of false accusation that leftists make against Wichita-based Koch Industries. In this excerpt from the company’s Koch Facts page, the work that Koch does to advance liberty for everyone is explained: “Throughout Koch’s long-standing record of public advocacy, we have been strong and steadfast supporters of individual liberties and freedoms. These values permeate all that we do as a company and every part of our public outreach. We help fund public and school-based educational programs across the country in an effort to increase citizens’ understanding of the relationship between economic liberty and democracy. We support voter registration efforts in the communities where we live and work, and for our tens of thousands of employees. We support civil rights programs through numerous organizations. We also help build entrepreneurial initiatives that foster the fundamental reality that economic freedom creates prosperity for everyone, especially the poor, in our society. … For many years, we have directly contributed to Urban League, Andrew Young Foundation, Martin Luther King Center, Latin American Association, 100 Black Men, Morehouse College, United Negro College Fund, and dozens of other worthy organizations pursuing similar civic missions. We founded and continue to support Youth Entrepreneurs in schools throughout Kansas, Missouri and Atlanta. This year-long course teaches high school students from all walks of life the business and entrepreneurial skills needed to help them prosper and become contributing members of society. … Many of the attacks against Koch in recent months are cynical posturing at best and deliberate falsehoods divorced from reality at worst. For proof, look no further than the false claim from groups like SEIU that we are somehow trying to suppress the right to vote. … Our freedom as individual Americans relies on the ability to hold the government accountable through the direct exercise of voting rights and the exercise of other individual liberties. We are unwavering in our commitment to these rights and we stand firmly behind our track record in defending them.”

    Private property saved the Pilgrims. At Thanksgiving time, the Economic Freedom Project reminds us how an early American experiment with socialism failed miserably, and how private property rights and free enterprise saved the day. See So, Is That My Corn or Yours?

    Did Grover Norquist derail the Supercommittee? To hear some analysts, you’d think that Grover Norquist of Americans for Tax Reform is responsible for no deal emerging from the United States Congress Joint Select Committee on Deficit Reduction (the “Supercommittee”). It’s ATR’s pledge to not increase taxes that is blamed, so they say. All members of the Kansas Congressional Delegation except Kevin Yoder signed the pledge. Paul Jacob is thankful for Norquist and that a tax increase was averted.

    Drive-through petition signing. From Americans for Prosperity, Kansas: The Wichita area chapter of the free-market grassroots group Americans for Prosperity (AFP) and other local groups have been working to collect signatures for a petition to put the hotel guest tax ordinance to a public vote. Volunteers will be collecting signatures this weekend during a “drive-thru” petition signing Friday, Saturday and Sunday at two Wichita hotels. Wichita activists are continuing their efforts to collect signatures for a petition to put the hotel guest tax ordinance to a public vote. Registered voters simply drive up to the listed locations and volunteers will bring a petition out to them. The times are from 9:00 am to 5:00 pm Friday and Saturday (Nov. 25 and 26), and 12:00 noon to 5:00 pm Sunday (Nov. 27). The locations are Wichita Inn East (8220 E. Kellogg Dr.) and Best Western Airport Inn (6815 W. Kellogg/US-54).

    Job creation. Governments often fall prey to the job creation trap — that the goal of economic development is to create jobs. We say this today in Wichita where several labor union leaders appeared before the Sedgwick County Commission to encourage the county to grant a subsidy to Bombardier Learjet. The labor leaders, naturally, pleaded for jobs. To them, and to most of our political and bureaucratic leaders, the more jobs created, the better. Our business leaders don’t do any better understanding the difference between capitalism and business. In his introduction to the recently-published book The Morality of Capitalism, Tom G. Palmer writes: “Capitalism is not just about building stuff , in the way that socialist dictators used to exhort their slaves to ‘Build the Future!’ Capitalism is about creating value, not merely working hard or making sacrifices or being busy. Those who fail to understand capitalism are quick to support ‘job creation’ programs to create work. They have misunderstood the point of work, much less the point of capitalism. In a much-quoted story, the economist Milton Friedman was shown the construction on a massive new canal in Asia. When he noted that it was odd that the workers were moving huge amounts of earth and rock with small shovels, rather than earth moving equipment, he was told ‘You don’t understand; this is a jobs program.’ His response: ‘Oh, I thought you were trying to build a canal. If you’re seeking to create jobs, why didn’t you issue them spoons, rather than shovels?” … After describing crony capitalism — the type practiced in Wichita, Sedgwick County, and Kansas, with deals like the complete funding by taxpayers of the Bombardier LearJet facility, Palmer explains: “Such corrupt cronyism shouldn’t be confused with ‘free-market capitalism,’ which refers to a system of production and exchange that is based on the rule of law, on equality of rights for all, on the freedom to choose, on the freedom to trade, on the freedom to innovate, on the guiding discipline of profits and losses, and on the right to enjoy the fruits of one’s labors, of one’s savings, of one’s investments, without fearing confiscation or restriction from those who have invested, not in production of wealth, but in political power.”

    Experts. David Freedman and John Stossel discuss experts, our reliance on them, the political advocacy that’s often involved, and how often experts are wrong.

  • Bombardier Learjet should pay just a little

    In a presentation made to economic development officials, aviation manufacturer Bombardier LearJet speaks with pride of its investment in Kansas. But for the present project before the Sedgwick County Commission today, it appears that the company is planning to make no investment at all.

    Bombardier LearJet financing plan. Later the document states “Requesting State of Kansas support to help find gap of $16M.”

    Taking the total project cost of $52.7 million and subtracting the government funding already secured, there is a gap of $16.1 million. Instead of being grateful for the $36.6 million in subsidy already (or about to be) secured, the company is asking for more: Bombardier LearJet is asking the State of Kansas to fund this gap.

    What happened to capitalism?

    What happened to companies funding even a portion of their capital requirements?

    The proponents of economic development incentives often make their case that the incentives are just a “sweetener” to secure the deal. But in the present case with Bombardier LearJet, local governments — the City of Wichita, Sedgwick County, and the State of Kansas — are being asked to pay for the entire meal.

    We in Kansas and Sedgwick County are already doing much for Bombardier LearJet. It is likely that we will agree to let LearJet forgo paying any property tax at all — the same property taxes that other business struggle to pay. These businesses compete with LearJet for labor and other things they need.

    The State of Kansas is allowing the income taxes of Lear Jet employees to be used for the exclusive benefit of that company.

    Both of these actions call into question the fundamental question of fairness in taxation: that all pay their fair share. When companies like the applicant company ask to be excused from the burden of taxation, others have to pay.

    If you are not persuaded by this appeal to principle, there is evidence that chasing the big catch is often counterproductive, and that the net economic effect of these deals is overestimated. One study finds: “Large-employer businesses have no measurable net economic effect on local economies when properly measured.”

    Perhaps the worst thing we take away from this episode is that our state is making no progress towards a concept developed by Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business. He 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, and other forms of subsidy. This is what we are doing with the present applicant, Bombardier LearJet.

    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 we are considering today: “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 to move away from economic development based on this active investor approach. This commission needs to advocate for policies — in this chamber, at Wichita City Hall, and at the Kansas Statehouse — that lead to sustainable economic development. What we’re doing today is not sustainable.

    A small and reasonable step towards this goal is to ask Bombardier LearJet to consider paying just $1 million themselves on a project with a cost of $52.7 million.

  • Wichita property taxes are high, leading to other problems

    An ongoing study by the Minnesota Taxpayers Association tells us that Wichita has high business property taxes. This may be a reason why the Wichita City Council feels it is necessary to offer relief from these taxes, but it is not an effective economic development strategy.

    The MTA study (50-State Property Tax Comparison Study) finds that for a business consisting of property and fixtures, the effective tax rate of business property in Wichita is 2.914 percent. The average nationwide is 1.940 percent. This means that these taxes in Wichita are 50.2 percent higher than the nationwide average.

    The situation isn’t so bad when we consider a different business with machinery and equipment as part of its mix of assets, as Kansas has exempted that property from taxation. In one scenario, the effective tax rate is 1.598 percent, which is still 12.1 percent above the nationwide average of 1.426 percent. In another scenario where the proportion of business property that is machinery and equipment is very high, the effective tax rate for Wichita is only slightly above the national average.

    The study finds that Wichita is out-of-step with the rest of the nation when it comes to the ratio of effective tax rates between business and home tax rates. The U.S. average for this value is 1.724, meaning that the effective tax rate for business property is 1.724 times that of residential property. For Wichita, the value is higher at 2.316.

    Wichita as active investor

    Last week’s grant by the Wichita City Council of tax relief to Pulse Systems in the amount of about $87,000 per year illustrates how the city’s high business property tax rates inhibit business investment. It’s either that, or the city succumbs to simple greed by those who are willing to ask the government for money and make empty threats in pleading their case.

    That day the city also started down a path that will lead it to exempting Bombardier LearJet from paying $1,217,000 per year in property taxes.

    I can understand that people such as these applicant companies want to escape paying high business property taxes. But the solution is not to do what the Wichita City Council does week after week: grant exemptions on a case-by-case basis. These exemptions amount to the council asking the people of Wichita to make specific investments in these companies. That’s because when the city grants exemptions from paying taxes, others have to pay. This may be a reason why our effective tax rate is so high — for those companies that do pay taxes.

    The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has taught that it is through markets and their coordination of dispersed knowledge that we learn where to direct capital investment. It is simply impossible for this city government to effectively decide which companies Wichitans should invest their tax dollars in.

    Locally, 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, and other forms of subsidy.

    While many feel that Wichita and Kansas must offer incentives to be competitive with our cities and states, our leaders, most recently Lynn Nichols, president of the Wichita Metro Chamber of Commerce, routinely complain that Wichita doesn’t have as much incentives and cash to offer as do other locations. The “embracing dynamism” approach advocated by Hall and others provides a way to break out of this rat race and provide a sustainable foundation for economic growth in Wichita and Kansas.

    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.”

    In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

    While it’s easy to see people going to work at a new large company, or an existing company that has expanded, we need to look at the effect on everyone in the city, county, or state. And when we do that, the research is not encouraging.

    Echoing the findings of Hayek regarding the impossibility of government picking winning companies through its active investor approach, Hall writes: “Embracing dynamism starts with a change in vision. Simply stated, the state government of Kansas should abandon its prevailing policy vision of the State as an active investor in businesses or industries and instead adopt the policy vision of the State as a caretaker of a competitive ‘platform’ — a platform that seeks to induce as much commercial experimentation as possible. By way of analogy, the platform-caretaker vision says: The State of Kansas runs tournaments; it does not field players. Creating a platform to host world-class tournaments will attract world-class players. The platform will endure but players will come and go. The platform-caretaker vision implies that the state government need not commit scarce resources to the enormously difficult task of predicting the outcome of competition if it focuses on the much more manageable task of creating the platform on which competition takes place.”

    We need business and political leaders in Wichita and Kansas who can see beyond the simple 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.

    Paying for incentives

    Something the Wichita City Council should consider implementing is a form of “pay-go.” This is where the city would reduce spending by the cost of economic development incentive.

    The city, however, believes it has cost-benefit studies that purport that incentives pay for themselves. These studies, provided by Wichita State University Center for Economic Development and Business Research are not of the same type that a business makes, or that people make in their personal lives. There are not legitimate business investments that have a return of what the city council routinely accepts over any reasonable period of time, at least not without accepting huge risks.

    The “benefit” that goes into these equations is in the form of future anticipated tax revenues. It simply recognizes that economic activity is good, and since government levies taxes based on economic activity, its tax revenues go up. This happens whether or not government claims responsibility for creating the economic activity.

    More taxes being paid to the city doesn’t benefit the people of Wichita, and it’s they who have to pay in order so that the city can have increased tax revenues. It’s not beneficial to take more money out of the productive private sector for the purpose of feeding government.

  • Kansas and Wichita quick takes: Thursday November 10, 2011

    Occupy Wall Street. One of the most troubling things about OWS is the anti-semitism. FreedomWorks has a video which explains. Also from FreedomWorks, president Matt Kibbe contributes a piece for the Wall Street Journal (Occupying vs. Tea Partying: Freedom and the foundations of moral behavior.). In it, he concludes: “Progressives’ burning desire to create a tea party of the left may be clouding their judgment. Even Mr. Jones has grudgingly conceded that tea partiers have out-crowd-sourced, out-organized, and out-performed the most sophisticated community organizers on the left. ‘Here’s the irony,’ he said back in July. ‘They talk rugged individualist, but they act collectively.’ He and his colleagues don’t seem to understand that communities can’t exist without respect for individual freedom. They can’t imagine how it is that millions of people located in disparate places with unique knowledge of their communities and circumstances can voluntarily cooperate and coordinate, creating something far greater and more valuable than any one individual could have done alone. In the world of the contemporary Western left, someone needs to be in charge — a benevolent bureaucrat who knows better than you do. They can’t help but build hierarchical structures — a General Assembly perhaps — because they don’t understand how freedom works.”

    Johnson Controls. Rhonda Holman’s recent Wichita Eagle editorial criticized those who spoke against the award of a forgivable loan to Johnson Controls, specifically mentioning the claim by Sedgwick County Commissioner Richard Ranzau that Johnson was going to move these jobs to Wichita “no matter what.” No one has disputed Ranzau. I specifically asked at the commission meeting that someone from Johnson address this assessment. The Johnson people in the audience chose not to answer. It would be helpful if someone at the newspaper or county at least pretended as through they cared about the truth of these matters. … At one time newspapers might have objected to Commission member Jim Skelton voting on this matter due to a family member working at Johnson. True, Kansas law says he was eligible to vote on the matter. Sedgwick County has no code of ethics that prohibited it, either. But Skelton could have acted as though the county had a code of ethics, and a model code of ethics says Skelton should not have voted on this matter.

    Save-A-Lot store opens. Yesterday a Save-A-Lot grocery store opened in Wichita’s Planeview neighborhood. This is a store that was said to be impossible to build without subsidy in the form of tax increment financing (TIF) and an extra community improvement district (CID) sales tax of two cents per dollar. The Sedgwick County Commission exercised its veto power over the TIF district, and developer developer Rob Snyder canceled his plans for the store. But someone else found a way. Said Snyder at the time to the Wichita City Council: “We have researched every possible way, how do we make this project work with the existing funding that’s available to us. … We might as well say if for some reason we can’t figure out how to get this funding to go through, there won’t be a shopping center over there.” As part of his presentation to the council Allen Bell, Wichita’s Director of Urban Development explained that to be eligible for TIF, developers must demonstrate a “gap,” that is, an analytical finding that conventional financing is not sufficient for the project, and public assistance is required: “We’ve done that. We know, for example, from the developer’s perspective in terms of how much they will make in lease payments from the Save-A-Lot operator, how much that is, and how much debt that will support, and how much funds the developer can raise personally for this project. That has, in fact, left a gap, and these numbers that you’ve seen today reflect what that gap is.” … This episode has severely harmed the credibility of those who plead for incentives and subsidies, and also of the city hall bureaucrats who plead their cases for them. For more see For Wichita, Save-A-Lot teaches a lesson.

    Teacher pay. A look at public school teacher pay by American Enterprise Institute finds that — opposite of the myth spread by school spending advocates — teachers are paid much more than they could earn in the private sector. While teachers are paid less than private sector workers with similar college degree attainment, the course of study for teachers is less demanding than most other fields. Fringe benefits for teachers are much higher than for private sector workers. Job security, even in the face of recent layoffs, is much greater for teachers and has a value: “Consider that one-fifth of the highest-performing public school teachers in Washington, D.C., recently declined to give up even part of their job security in exchange for base salary increases of up to $20,000.” … The authors note the study is based on averages: “Our research is in terms of averages. The best public school teachers — especially those teaching difficult subjects such as math and science — may well be underpaid compared to counterparts in the private sector.” But teachers have formed unions that ensure that all teachers are paid the same without regard to ability. See Public School Teachers Aren’t Underpaid: Our research suggests that on average — counting salaries, benefits and job security — teachers receive about 52% more than they could in private business. … Naturally, the best way to set teacher salaries is through voluntary exchange in markets. That doesn’t happen with public school teachers.

    Ranzau, Skelton to speak. This week’s meeting (November 11th) of the Wichita Pachyderm Club features Sedgwick County Commission Members Richard Ranzau and Jim Skelton, speaking on “What its like to be a new member of the Sedgwick County Board of County commissioners?” The public is welcome and encouraged to attend Wichita Pachyderm meetings. For more information click on Wichita Pachyderm Club. … Upcoming speakers: On November 18th: Delores Craig-Moreland, Ph.D., Wichita State University, speaking on “Systemic reasons why our country has one of the highest jail and prison incarceration rates in the world? Are all criminals created equal?” … On November 25th there will be no meeting.

    Making economics come alive. On Monday November 14th Americans for Prosperity Foundation will show the video “Making Economics Come Alive” with John Stossel. Topics included in this presentation are Economics of Property Rights, Private Ownership and Conservation, Property Rights and the Status of Native Americans, Atlas Shrugged: Selfishness and the Economics of Exchange, Economics and the Military Draft, Regulation and Unintended Consequences, Regulation: Louisiana Florist, The Unintended Consequences of the Ethanol Subsidies, The Unintended Consequences of Minimum Wage Laws, Public Choice Economics and Crony Capitalism, Trade Restrictions and Crony Capitalism, Stimulus Spending and Crony Capitalism, and Political Versus Market Choices. This free event is from 7:00 pm to 8:30 pm at the Lionel D. Alford Library located at 3447 S. Meridian in Wichita. The library is just north of the I-235 exit on Meridian. For more information on this event contact John Todd at john@johntodd.net or 316-312-7335, or Susan Estes, AFP Field Director at sestes@afphq.org or 316-681-4415.

    Economics in two minutes. In two minutes, Art Carden explains the important ideas of economics in Economics on One Foot: “Individuals strive to achieve their goals in the best ways possible, every action has a cost, incentives matter, value is determined on the margin, profits and losses help gauge value creation and destruction, and government interventions often have unintended and undesirable consequences.” … This video is from LearnLiberty.org, a project of Institute for Humane Studies, and many other informative videos are available.

  • Giving away the store to get a store

    This article first appeared in Reason magazine and Reason.com at this link. It details many of the reasons why tax increment financing (TIF) districts are not a good economic development tool. Wichita will again chase the dream of “something for nothing” when it considers establishing a TIF district at its December 6th meeting.

    Giving Away the Store to Get a Store

    Tax increment financing is no bargain for taxpayers.
    By Daniel McGraw.

    If you’re imagining an attraction that will draw 4.5 million out-of-town visitors a year, the first thing that jumps to mind probably isn’t a store that sells guns and fishing rods and those brown jackets President Bush wears to clear brush at his ranch in Crawford, Texas. Yet last year Cabela’s, a Nebraska-based hunting and fishing mega-store chain with annual sales of $1.7 billion, persuaded the politicians of Fort Worth that bringing the chain to an affluent and growing area north of the city was worth $30 million to $40 million in tax breaks. They were told that the store, the centerpiece of a new retail area, would draw more tourists than the Alamo in San Antonio or the annual State Fair of Texas in Dallas, both of which attract 2.5 million visitors a year.

    The decision was made easier by the financing plan that Fort Worth will use to accommodate Cabela’s. The site of the Fort Worth Cabela’s has been designated a tax increment financing (TIF) district, which means taxes on the property will be frozen for 20 to 30 years.

    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.

    A Crummy Way to Treat Taxpaying Citizens

    TIFs have been around for more than 50 years, but only recently have they assumed such importance. 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.

    “There is always this expectation with TIFs that the economic growth is a way to create jobs and grow the economy, but then push the costs across the public spectrum,” says Greg LeRoy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. “But what is missing here is that the cost of developing private business has some public costs. Road and sewers and schools are public costs that come from growth.” Unless spending is cut — and if a TIF really does generate economic growth, spending is likely to rise, as the local population grows — the burden of paying for these services will be shifted to other taxpayers. Adding insult to injury, those taxpayers may include small businesses facing competition from well-connected chains that enjoy TIF-related tax breaks. In effect, a TIF subsidizes big businesses at the expense of less politically influential competitors and ordinary citizens.

    (more…)

  • Johnson Controls loan not needed

    Tomorrow the Sedgwick County Commission will consider making a forgivable loan in the amount of $42,500 to Johnson Controls.

    A forgivable loan means that the county immediately pays the loan principle to the company. Then, if performance goals are met over the next five years in this case, the county forgives a portion of the loan each year. At the end of five years the company will owe the county nothing, if the criteria are met.

    Economically, the forgivable loan is equivalent to a grant of money subject to meeting performance criteria. In this case, the criteria consists of maintaining a certain level of employment.

    Johnson is a very large company, with 137,000 worldwide employees and a profit of $1,540,000,000. So this is not a small company, or a startup company, or a company that lacks for money, or a company that isn’t successful. Its stock has far outperformed leading market indexes over the past ten years. The City of Wichita approved a forgivable loan for the same amount.

    The harm of crony capitalism

    The harm of economic development programs like this is that when the city, county, and state make them available, companies will take advantage of them. Evidently companies find it’s easy to persuade this state and this commission to grant them money.

    At least easier than it is to raise equity, where you have to trade shares of ownership for money. Or in debt markets, where you have to pay interest and principal.

    This behavior creates a self-fulfilling feedback loop. Company A sees what Companies B, C, D, E, F (and so on …) have received from the city, county, and state, and they want it too. Soon we may find ourselves in the situation where few companies will consider Wichita and Sedgwick County without some form of handout.

    But the real harm that these programs do is the destruction of civil society. By that I mean a society that respects individuals and property rights, and where people trade harmoniously with others through markets. This includes companies attempting to raise investment capital, like the applicant company today.

    Instead, we replace a civil society and market entrepreneurship with political entrepreneurship, and with all the negatives that accompany that.

    If we in Sedgwick County are looking to distinguish ourselves, let’s start today by rejecting crony capitalism as our economic development tool.

    The proposal document

    The proposal document delivered to Johnson Controls by the Kansas Department of Commerce was written by a business consultant in Hoffman Estates, Illinois. This naturally leads to the question: can’t someone in Kansas do this work? A Department of Commerce official explained that the department has several consultants “on the ground in the markets they serve” to better work with clients in their markets. The Department believes this work can be done at lower cost and with greater flexibility this way.

    Second, the Department of Commerce document includes as part of the incentive package an item labeled “Personal Property Tax Exemption” with a value of $1,143,563. Other incentives are valued at $1,168,000, for a total of $2,311,563.

    Interestingly, when this proposal came before the Wichita City Council, the value of the state incentives was given as $1,168,000. In its presentation, Wichita officials didn’t include the personal property tax exemption in the value of the deal.

    There’s good reason for that. The $1,168,000 represents incentives crafted specifically for Johnson. But the personal property tax exemption is available to anyone, as the porposal document later explains. Kansas hasn’t taxed this type of property since 2006.

    So whether to include the value of this tax savings as an incentive is open to question. The Department of Commerce says that since not all states offer this tax exemption, it is an advantage that Kansas can offer. It’s the type of advantage that Kansas ought to create more of, as it is something that applies equally to all companies, not just to those who apply and fit into state-developed criteria. This represents the state acting as a caretaker of a level competitive playing field, rather than as an active investor in specific companies. (The other incentives, the $1,168,000 is the state acting as active investor.)

    What is most troubling about this forgivable loan and the state incentive package is that it isn’t necessary in this case. Commissioner Richard Ranzau participated in a tour of the Johnson facility, and he says that company officials said the jobs were coming to Wichita no matter what, in Ranzau’s assessment.

    And in response to a question by Commissioner and Chair Dave Unruh as to where else the jobs could go, Ranzau reported the answer was that Wichita is the only place that made sense.

    So the obvious question is: Why are we spending money on these subsidies when the company already has planned to move the equipment and jobs to Wichita?

    Conflict of interest

    Another issue involving the proposed forgivable loan to Johnson is the fact that, according to Ranzau, Commissioner Jim Skelton’s brother works for Johnson.

    Under Kansas law, this fact alone does not establish a conflict of interest. Sedgwick County, apparently, does not have a code of ethics that covers situations like this.

    CityEthics.org has a model ethics code that cities and counties might adopt. It states: “An official or employee may not use his or her official position or office, or take or fail to take any action, or influence others to take or fail to take any action, in a manner which he or she knows, or has reason to believe, may result in a personal or financial benefit, not shared with a substantial segment of the city’s population, for any of the following persons or entities …”

    The code goes on to define sibling as a member of the class of persons to which this code applies.

    If the county had a code of ethics like this, Commissioner Skelton would not be able to participate or vote on this matter. So while Kansas law does not require Skelton to step aside for this item, he certainly could do so on his own initiative, and he should.

  • Pompeo to introduce ‘Energy Freedom and Economic Prosperity Act’

    This week U. S. Representative Mike Pompeo of Wichita plans to introduce the “Energy Freedom and Economic Prosperity Act,” a bill that would eliminate all tax credits related to energy.

    Tax credits, sometimes called tax expenditures, are spending accomplished through the tax code rather than by legislative appropriations. Two prominent tax credits related to energy production are the tax credit for producing and blending ethanol with gasoline, and the production tax credit for wind and solar power production. These industries have claimed that the tax credits are necessary for these forms of energy to be economically viable.

    Pompeo’s office estimates that the bill could save up to $90 billion in tax expenditures over the next ten years. The legislation proposes that these savings be used to reduce the corporate income tax rate.

    The subsidies that would be repealed include, according to Pompeo’s office: Plug-In electric and fuel cell vehicles, Alternative fuel and alternative fuel mixtures, Cellulosic Biofuel Producer Credit, Alternative fuel infrastructure, Production Tax Credit for electricity produced from renewable sources, including wind, biomass, and hydropower, Investment Tax Credit for equipment powered by solar, fuel cells, geothermal or other specified renewable sources, Enhanced oil recovery credit, and credit for producing oil and gas from marginal wells, Advanced Nuclear Power Generation Credit, and Clean coal investment credits.

    This bill targets tax credits only. Loans and loan guarantees are not a subject. This bill would not affect the programs that funded Solyndra, a high-profile example of failure. This bill would not affect the $132.4 million loan guarantee recently given to a cellulosic ethanol plant in southwest Kansas, either.

    Pompeo’s office stresses that this is not a bill targeted at renewable forms of energy like ethanol and wind. It affects all tax credits, including those that are directed at the nuclear, coal, and oil and gas. The goal is to get government out of the energy sector and let markets direct energy investment.

    This bill represents a continued effort by Pompeo to reduce government intervention and to give more freedom to markets. Politically, it puts him at odds with many in this state who favor expansion of wind energy in Kansas. In particular, Kansas Governor Sam Brownback is a proponent of wind power and ethanol. Wichita Mayor Carl Brewer is also promoting Wichita as a place for wind power companies to locate.

  • Kansas and Wichita quick takes: Wednesday October 26, 2011

    Tax increment financing. “Largely because it promises something for nothing — an economic stimulus in exchange for tax revenue that otherwise would not materialize — this tool [tax increment financing] is becoming increasingly popular across the country. … ‘TIFs are being pushed out there right now based upon the but for test,’ says Greg LeRoy. ‘What cities are saying is that no development would take place but for the TIF. … The average public official says this is free money, because it wouldn’t happen otherwise. But when you see how it plays out, the whole premise of TIFs begins to crumble.’ Rather than spurring development, LeRoy argues, TIFs ‘move some economic development from one part of a city to another.’ … In Wichita, those who invest in TIF districts and receive other forms of subsidy through relief from taxes are praised as courageous investors who are taking a huge risk by believing in the future of Wichita. Instead, we should be asking why we have to bribe people to invest in Wichita. Much more on tax increment financing at Giving Away the Store to Get a Store: Tax increment financing is no bargain for taxpayers from Reason Magazine.

    Tax incentives questioned. In a commentary in Site Selection Magazine, Daniel Levine lays out the case that tax incentives that states use to lure or keep jobs are harmful, and the practice should end. In Incentives and the Interstate Competition for Jobs he writes: “Despite overwhelming evidence that state and local tax incentives are having little to no positive effect on promoting real economic growth anywhere in the country, states continue to up the ante with richer and richer incentive programs. … there are real questions as to whether the interstate competition for jobs is a wise use of anyone’s tax dollars and, if not, then what can be done to at least slow down this zero sum game?” As a solution, Levine proposes that the Internal Revenue Service classify some types of incentives as taxable income to the recipient, which would reduce the value and the attractiveness of the offer. Levine also correctly classifies tax credits — like the historical preservation tax credits in Kansas — as spending programs in disguise: “Similarly, when a ‘tax credit’ can be sold or transferred if unutilized it ceases to have a meaningful connection to state tax liability. Instead, in such circumstances the award of tax credit is merely a delivery mechanism for state subsidy.” In the end, the problem — when recognized as such — always lies with the other guy: “Most state policy makers welcome an opportunity to offer large cash incentives to out-of-state companies considering a move to their state but fume with indignation when a neighboring state uses the same techniques against them.”

    The Moral Case Against Spreading the Wealth. From The Moral Case Against Spreading the Wealth by Leslie Carbone: “After two years, the results of President Obama’s wealth-spreading policies have confirmed centuries of economics, political philosophy, and common sense: Forced wealth redistribution doesn’t make things good for everybody; it makes things worse, both fiscally and morally.” Carbone explains the two reasons: Government-mandated wealth distribution does create prosperity, and it’s not a legitimate function of government. On the type of behavior we’d like to see in people, she writes: “Wealth redistribution discourages the virtuous behavior that creates wealth: hard work, saving, investment, personal responsibility.” After explaining other problems that progressive taxation — wealth redistribution — causes, she sounds a note of optimism; “Through Tea Parties and popular protests, millions of Peters and Pauls, and Joe the Plumbers are rejecting what F.A. Hayek so aptly called the fatal conceit of paternalistic government. Decades of federal expansion have demonstrated what history, economics, philosophy, and common sense have told us all along: People, working through the market, are the engines of prosperity, both moral and financial — but only if we get government out of their way.” Leslie Carbone is the author of Slaying Leviathan: The Moral Case for Tax Reform. That book expands on the ideas presented in this article.

    Political pretense vs. market performance. What is the difference between markets and politics or government? “There is a large gap between the performance of markets and the public’s approval of markets. Despite the clear superiority of free markets over other economic arrangements at protecting liberty, promoting social cooperation and creating general prosperity, they have always been subject to pervasive doubts and, often, outright hostility. Of course, many people are also skeptical about government. Yet when problems arise that can even remotely be blamed on markets, the strong tendency is to ‘correct’ the ‘market failures’ by substituting more government control for market incentives.” The article is The Political Economy of Morality: Political Pretense vs. Market Performance by Dwight R. Lee. Lee explains the difference between “magnanimous morality” (helping people) and “mundane morality” (obeying the generally accepted rules or norms of conduct). Markets operate under mundane morality, which is not as emotionally appealing as as magnanimous morality. But it’s important, as it is markets — not government — that have provided economic progress. There’s much more to appreciate in this article, which ends this way: “The rhetoric dominating the public statements of politicians and their special-interest supplicants is successful at convincing people that magnanimous morality requires substituting political action for market incentives, even though the former generates outcomes that are less efficient and moral than does the latter. The reality is that political behavior is as motivated by self-interest as market behavior is. … As long as there are people who cannot resist the appeal of morality on the cheap, the political process will continue to serve up cheap morality. And the result will continue to be neither moral nor cheap.”

    Increasing taxes not seen as solution. “Leaving aside the moral objection to tax increases, raising taxes won’t in fact solve the problem. For one thing, our public servants always seem to find something new on which to spend the additional money, and it isn’t deficit reduction. But more to the point, tax policy can go only so far, given the natural brick wall it has run into for the past fifty years. Economist Jeffrey Rogers Hummel points out that federal tax revenue ‘has bumped up against 20 percent of GDP for well over half a century. That is quite an astonishing statistic when you think about all the changes in the tax code over the intervening years. Tax rates go up, tax rates go down, and the total bite out of the economy remains relatively constant. This suggests that 20 percent is some kind of structural-political limit for federal taxes in the United States.’” From Rollback: Repealing Big Government Before the Coming Fiscal Collapse by Thomas E. Woods, Jr. Hummel’s article may be read at Why Default on U.S. Treasuries is Likely. A similar concept is Hauser’s Law.