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Tax abatements

11 Feb

The harmful effects of Wichita’s special tax favors

Bob Weeks

In the past few weeks a handful of companies in Wichita have asked to be exempted from paying property taxes on investments they have made. This week Wichita may decide to grant special tax treatment to a large development in downtown Wichita.

Is it wise for the City of Wichita to grant these special tax favors?

Because capital for investment is in short supply, it is important that our economy allocate it where it does the most good, where it is valued most. Markets do a very good job of this when they operate free of government meddling. When government intervenes, however, decisions about how to allocate investment capital will be made for all sorts of non-economic reasons.

Here in Wichita, for example, there are some who believe that downtown Wichita suffers from underinvestment when compared to some of the city’s outlying areas. These people — many of them holding political office or a quasi-governmental position — seek to use government and its ability to tax (or not to tax) to achieve their goals. They have passed measures like the sales tax to fund the downtown Wichita arena. Downtown developers and businesses are given tax breaks, tax abatements, and they may obtain low-interest loans backed by the credit of the City of Wichita. A special tax district overlays downtown, with the proceeds being used to promote downtown’s interest in receiving more governmental largesse. Downtown is also filled with special tax increment financing or TIF districts, where property tax revenues that would normally be used to fund the general operations of government are instead diverted to enhance the profitability of the developer’s project.

All this favorable treatment means that projects that would not be feasible on their own merits are undertaken because they satisfy a political agenda. This results in misallocation of scare capital. It’s also not fair to those who risk their own capital without receiving special government favor, meaning that we may have less investment overall in Wichita because of reluctance to compete with tax-favored investors.

This interventionism is also harmful in that it creates a special class of firms: those firms who have asked for and received government favor. They gain a competitive advantage over their direct competitors. As Karl Peterjohn of the Kansas Taxpayers Network has taught me, these firms also have a competitive advantage over other firms of all types in Wichita. That’s because firms of all types that don’t receive special tax favors have higher overhead, and therefore may not be able to compete with the tax-favored firms in paying attractive wages to obtain employees.

This interventionism is harmful again because it creates a class of political entrepreneurs rather than market entrepreneurs. Instead of seeking to create products and services that please customers, they seek to please politicians and bureaucrats. This behavior, called rent-seeking, produces nothing of value to the economy as a whole.

Furthermore, if what those who seek special tax treatment say is true, that is, that the projects they propose would not be feasible if they had to pay their taxes, we have a serious problem: we have taxes that are so high that they inhibit private investment.

Finally, when government reduces someone’s tax and doesn’t reduce its own spending, the rest of the taxpayers have to make up the difference.

I propose a partial solution to this problem that will help our leaders become aware of the cost of this problem, and will also alleviate some of the inequity. When the City of Wichita (or any other taxing authority) grants special tax treatment, it must reduce its spending by the same amount. By following this simple rule, the City can be reminded of the cost of granting special tax favors, and the rest of us won’t have to pay for them.

08 Nov

City of Wichita acknowledges taxes are not good for business

Bob Weeks

On November 6, 2007, the Wichita City Council considered and approved a request by Learjet for industrial revenue bonds. One of the benefits of IRBs such as these is that the property purchased with the proceeds is usually exempt from property tax. In this case, the period of tax abatement is ten years.

In the minutes of the meeting, under the heading “Economic Vitality and Affordable Living” we can read: “Granting an ad valorem property tax exemption and sales tax exemption will encourage the business to create new job opportunities and stimulate economic growth for the City of Wichita and Sedgwick County.”

Wow! Someone in city hall realizes that a reduction in taxes is good for business, and is reducing taxes in response to that revelation.

Now if all businesses and individuals could have lower taxes — instead of only those who lobby government for special favor — think how nice that would be. The economic benefit that this tax reduction will bring to Learjet could be felt across our entire city.

06 Feb

Tax increment financing in Wichita benefits few

Bob Weeks

Today the Wichita City Council votes on granting $4.5 million in tax increment financing to a developer. Here’s an article from August 17, 2006 that explains why the council should not approve this gift.

(Note to The Wichita Eagle: Why not report stories like this a little earlier than the day the council is voting?)

Recently the City of Wichita formed a TIF (tax increment financing) district to aid a developer who wishes to build in the College Hill neighborhood.

How does a TIF district work? The Wichita Eagle reported: “A TIF district doesn’t cost local governments any existing tax money. It takes property taxes paid on new construction that would ordinarily go into government coffers and redirects it to the bond holders who are financing the project.”

In the present case, the value of the benefit the developer sought is estimated to be worth $3.5 million to $4 million. Whether this benefit is given at no cost to existing government, as The Wichita Eagle article implies, is open to debate. If the new development does not use any local government services, then perhaps there is no cost in giving the benefit. But if that’s true, we might ask this question: if the development does not consume any government services, why should it have to pay taxes at all?

There is evidence that TIF districts are great for the developers — after all, who wants to pay taxes — but not so good for the rest of the city and county. The article Tax Increment Financing: A Tool for Local Economic Development by economists Richard F. Dye and David F. Merriman states, in its conclusion:

TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.

So TIFs are good for the favored development — not a surprising finding. What about the rest of the city? Continuing from the same study:

We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

So TIF districts may actually reduce the rate of economic growth in the rest of the city.

There’s also evidence that TIF districts are simply a transfer of wealth from the taxpayers at large to a privileged few. In the paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” by Iowa State University economists David Swenson and Liesl Eathington, we can read this:

There is indirect statistical evidence that this profligate practice [establishing TIF districts] is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.

This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. … there is virtually no evidence of broad economic or social benefits in light of the costs.

In the present case in Wichita, the developer says that without the benefit the TIF provides, the project is not economically viable. This is the standard rationale given for the requirement of the TIF district. Without the TIF, the development would not take place.

It may be true that this project in College Hill is not economically viable. If so, we have to wonder about the wisdom of investing in this project. More importantly, we should ask why our taxes are so high that they discourage investment and economic activity.

It may also be that the developer simply wishes to gain an advantage over the competition by lobbying for a favor from government. As government becomes more intrusive, this type of rent-seeking behavior is replacing productive economic activity.

There is one truth, however, if which I am certain: when businesses and individuals pay less tax, they have the opportunity to invest more. TIFs and tax abatements are tacit recognition that the cost of government is onerous and serves to decrease private economic activity and investment.

Here’s a better idea: reduce taxes for everyone, instead of only for companies and individuals that are successful in extracting favors from our local governments.

12 Dec

Wichita City Council and Cessna Aircraft Company Industrial Revenue Bonds

Bob Weeks

I received this letter written to Wichita Mayor Carlos Mayans and members of the Wichita City Council. The author makes excellent points about the harmful effects of special tax treatment for special interests. A better goal would be to work to reduce taxes for all companies and all people. This way, each company and individual can decide how to make best use of their own funds, instead of the Wichita City Council deciding for us. That is, in effect, what tax breaks like this do. It is the government deciding that resources should be allocated in a way different than how the market has decided. Our experience tells us that governments aren’t as smart as markets, and that governments almost always allocate resources inefficiently.

Mayor Carlos Mayans
Wichita City Hall
455 N. Main St.
Wichita, KS 67202

Dear Mayor Mayans:

Item 27 on the Wichita City Council’s December 12, 2006 agenda would have the city council approve a $99 million bond issuance for Cessna Aircraft Co. This is based upon the total $800 million Industrial Revenue Bonds (IRB) for Cessna Aircraft Company authorization approved earlier this year by this council.

If that is the case, the $99 million issuance (100% abatement) being sought will reduce city property tax revenues by my calculations almost $800,000 a year, or roughly $4 million to the city over five years. The total value of the tax break when all units of government are included is much larger.

That is a large tax break for Cessna Aircraft Company. This is a sizable reduction when city property tax revenues were projected at $89.5 million for 2006. According to the largest taxpayer list from the Wichita Business Journal, Cessna Aircraft Company paid $2,484,343 in property taxes in 2005. The abatement being sought is the equivalent of almost 32% of the property taxes paid by this company in 2005.

Earlier this year Mr. Jack Pelton, the President and CEO of Cessna Aircraft Company, provided public testimony in support of raising property taxes in Sedgwick County almost 10 percent. That is certainly a position that both Mr. Pelton and his company may take. According to Textron’s 2005 annual report (www.textron.com/resources/textron_annual_report_2005.pdg), the Cessna Aircraft earnings for this publicly traded company were $457 million so they could certainly afford to pay their share of this increase. In fact, they can afford to pay this tax with greater ease than almost every other Wichitan or Wichita based company.

This week Mr. Pelton and Cessna Aircraft’s ordinance for this large property tax reduction/IRB for this firm will be in you and your city council colleagues’ hands. You and your council colleagues need to know that this tax break demonstrates rank hypocrisy from both Cessna Aircraft and Mr. Pelton. This council item conflicts with Cessna’s support for higher property taxes countywide this summer. Mr. Pelton and Cessna Aircraft Company want special property tax breaks that the rest of the citizens in Wichita do not receive.

Two recent national surveys indicate that Kansas has high property taxes. The Tax Foundation (see Special Report 146, Nov. 2006) and the Small Business & Entrepreneurship Council (Small Business Survival Index 2006) have both issued reports showing that Kansas has the overall highest property taxes on a statewide basis of the five states (KS and surrounding states) in our region. Nationally, Kansas was among the top 25 percent of property taxes measured both as a percentage of income or on a per capita basis. Neighboring Oklahoma, in contrast, scored as the 4th lowest among all 50 states.

Kansas has high taxes in general and high property taxes in particular. However, the tax abatement for Cessna Aircraft does not eliminate the tax burden. This tax is shifted onto the backs of homeowners, farmers, and small and medium sized businesses in this community who lack the political clout to receive a property tax abatement. The total tax break for Cessna from all levels of Kansas government is almost $3 million a year or just under $15 million over the next five years (assuming current mill levies). Ironically, all national surveys indicate that small business is more successful in creating jobs than large firms.

So Cessna Aircraft will soon receive another special tax break. This is on top of earlier IRBs issued on their behalf by the city. Other employers will have to pay their property tax plus the share shunned by Cessna Aircraft. Cessna Aircraft’s overhead costs are reduced with the property tax abatement. As a result Cessna Aircraft is able to pay employees more and be more selective in hiring. After all, these overhead costs have been shifted onto the rest of the taxpaying community. Businesses without the property tax abatements have to pay higher overhead costs (in the form of higher property taxes) and are at a competitive disadvantage for hiring workers from within this community if they compete with Cessna (or other firms with these tax breaks) in hiring workers.

Special tax breaks for special firms hurt the smaller businesses that compete for labor against these firms. This provides a major warning sign to outside firms that might consider relocating into Wichita. These special tax breaks raise the risk and uncertainty for firms without these breaks in this community. This is a major reason why it is hard to attract firms into the Wichita market.

It is clear that Cessna Aircraft Company’s concern about high property taxes does not extend beyond the company’s property line. In addition, the cyclical nature of Cessna Aircraft’s business has meant sizable and substantial changes in the company’s employment. Despite these sizable tax breaks, Cessna’s Wichita employment is much lower in 2005 with 8,500 employees than it was five years earlier when Cessna had 12,509 employees. Cessna Aircraft’s employment figures have changed dramatically according to the Wichita Business Journal’s employment figures. The numbers change substantially annually.

That is another reason why Cessna Aircraft Company needs to shift their overhead costs onto the rest of the community. Companies that engage in widespread “hiring/firing” binges have a harder time attracting and keeping workers. This is especially true for skilled and highly educated workers. If they pay the same overhead costs as the other firms seeking Wichita area workers, they have a problem finding workers. Cessna needs to be able to offer extra wages and/or benefits to attract workers into this type of cyclical company.

There is no reason that Cessna Aircraft Company’s self imposed problems should be shifted onto Wichita area taxpayers at large. Cessna Aircraft Company has testified in support of raising property taxes in this community. The Wichita city council should reject their request for an additional property tax abatement, and welcome them into the high property tax environment that they supported in front of the Sedgwick County commission this summer. Help Cessna Aircraft Company end their policy of tax hypocrisy and their plan to shift higher taxes onto the non-abated firms and the rest of the citizens in this community.

09 Dec

Maximum taxes means minimum growth

Bob Weeks

Maximum Taxes Means Minimum Growth
By Karl Peterjohn, Kansas Taxpayers Network

Kansas has high taxes. Even worse, the high taxes are high property taxes that stifle capital formation and hold down wages. Two new studies rank Kansas at the bottom of this region when it comes to soaring property taxes. That should not be too surprising since Kansas and Nebraska are the two states that provide their citizens will almost no opportunity to vote on whether or not property taxes should be raised.

The Tax Foundation as well as the Small Business & Entrepreneurship Council both issued reports recently pointing out Kansas’ high property tax status. The Tax Foundation measured property taxes per person as well as a percentage of income and Kansas scored 13th and 14th highest among the 50 states and the District of Columbia on these two measurements.

All of the surrounding states in our region were lower than Kansas. Nebraska came closest to Kansas with slightly lower property taxes than Kansas. Oklahoma easily had the lowest property taxes in this region scoring 47th out of the 50 states and the District of Columbia, according to this Tax Foundation study using 2004 federal tax data.

High property taxes are a major burden stifling economic growth. So it really should not be a surprise that Kansas has had lagging growth for quite a while. While federal tax revenues have grown 30 percent over the last two years, Kansas growth has been less than 2/3 the national rate. That type of stagnation occurs when taxes are excessive.

Confirming the Tax Foundation was the Small Business & Entrepreneurship’s 2006 study ranking the business climate in all 50 states. The SBE property tax data also ranked Kansas with the 13th highest property taxes in the country. Nebraska was 18th, Colorado 33rd, Missouri 40th, and Oklahoma 47th.

If a business has a bad year and loses money, there is no corporate income tax due. The corporate income tax is paid only when a profit is made. Property taxes ignore profits or the lack thereof. These taxes must be paid regardless of the success or failure of the business, farm, or family.

Kansas high property taxes make this state a much harder place to successfully operate for the average business. In addition to having higher property tax rates, the fact that citizens do not get to vote on raising property taxes makes it easier to raise these rates even higher and this increases the uncertainty and risk of operating a Kansas business.

In the second largest county in Kansas, Sedgwick County commissioners took up a proposal to raise county property taxes as much as 14 percent last summer. The unanimous and bipartisan five member commission voted to raise the property tax over eight percent. This was in addition to the automatic property tax hike through higher appraisals that totaled six percent.

If Sedgwick County voters would have had the opportunity to vote on this tax hike, it is likely that this tax hike would have been defeated. Two of the three incumbent commissioners who were up for reelection who voted for this tax hike lost their office to challengers who opposed that tax hike and pledged not to make any further increases.

The largest private employer in Sedgwick County covering the Wichita area is Cessna Aircraft. Cessna and other large aircraft firms testified in support of raising this property tax to get taxpayer subsidies for training aircraft workers in this highly cyclical industry. Cessna President Jack Pelton personally testified in support of raising property taxes to subsidize his business by expanded worker training programs.

The aircraft industry layoffs in the Wichita area followed the September 11 attack and the 2000 recession. Since 2005 the aircraft industry has been on a cyclical rebound.

The Wichita aircraft industries were back in front of the Wichita city council seeking hundreds of millions of dollars in property tax abatements in November. Sadly, this segment of big business in Kansas is supportive of higher property taxes for everyone else besides themselves.

Cessna has over 8,000 Wichita area employees. This is down several thousand from 2001. However, despite the declining workforce, the demands for special property tax breaks for Cessna and other aircraft firms continue to grow. Small business, homeowners, and other property taxpayers get to make up the difference for these corporate tax hypocrites. That shift in the tax burden is not apparent when examining Kansas’ overall property tax rating. This makes Kansas’ effective tax rate much higher for the Kansans excluded from the special property tax breaks. These are all reasons why Kansas growth lags.

17 Aug

Tax increment financing in Wichita benefits few

Bob Weeks

Recently the City of Wichita formed a TIF (tax increment financing) district to aid a developer who wishes to build in the College Hill neighborhood.

How does a TIF district work? The Wichita Eagle reported: “A TIF district doesn’t cost local governments any existing tax money. It takes property taxes paid on new construction that would ordinarily go into government coffers and redirects it to the bond holders who are financing the project.”

In the present case, the value of the benefit the developer sought is estimated to be worth $3.5 million to $4 million. Whether this benefit is given at no cost to existing government, as The Wichita Eagle article implies, is open to debate. If the new development does not use any local government services, then perhaps there is no cost in giving the benefit. But if that’s true, we might ask this question: if the development does not consume any government services, why should it have to pay taxes at all?

There is evidence that TIF districts are great for the developers — after all, who wants to pay taxes — but not so good for the rest of the city and county. The article “Tax Increment Financing: A Tool for Local Economic Development” by economists Richard F. Dye and David F. Merriman states, in its conclusion:

TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.

So TIFs are good for the favored development — not a surprising finding. What about the rest of the city? Continuing from the same study:

We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

So TIF districts may actually reduce the rate of economic growth in the rest of the city.

There’s also evidence that TIF districts are simply a transfer of wealth from the taxpayers at large to a privileged few. In the paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” by Iowa State University economists David Swenson and Liesl Eathington, we can read this:

There is indirect statistical evidence that this profligate practice [establishing TIF districts] is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.

This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. … there is virtually no evidence of broad economic or social benefits in light of the costs.

In the present case in Wichita, the developer says that without the benefit the TIF provides, the project is not economically viable. This is the standard rationale given for the requirement of the TIF district. Without the TIF, the development would not take place.

It may be true that this project in College Hill is not economically viable. If so, we have to wonder about the wisdom of investing in this project. More importantly, we should ask why our taxes are so high that they discourage investment and economic activity.

It may also be that the developer simply wishes to gain an advantage over the competition by lobbying for a favor from government. As government becomes more intrusive, this type of rent-seeking behavior is replacing productive economic activity.

There is one truth, however, if which I am certain: when businesses and individuals pay less tax, they have the opportunity to invest more. TIFs and tax abatements are tacit recognition that the cost of government is onerous and serves to decrease private economic activity and investment.

Here’s a better idea: reduce taxes for everyone, instead of only for companies and individuals that are successful in extracting favors from our local governments.

17 Aug

Sedgwick County surrenders key tax advantage

Bob Weeks

Sedgwick County Surrenders Key Tax Advantage
By Karl Peterjohn, Executive Director, Kansas Taxpayers Network

Spirit Aerosystems CEO Jeff Turner defended the massive spending hike that was used as the primary justification for the county’s 8.8 percent property tax hike in his editorial August 9, 2006. Turner’s support for this increased government spending ignored some important ramifications behind this economically destructive vote.

Sedgwick County has an important fiscal advantage over 19 other Kansas counties. Sedgwick County has no community college and hence no community college property tax. That property tax is a major reason why this levy makes the total tax burden higher in Butler, Cowley, and Reno counties. The Wichita Area Technical College is becoming this community’s community college. This will mean increasing pressure to raise property taxes. This would be in addition to the current 1.5 mills left over from the old Wichita University days that the county charges.

Sadly, the Sedgwick County commission seems intent on creating another tax dependent entity here in this community. If Jeff Turner, Spirit Aerosystems and Turner’s former company Boeing want to promote property tax hikes, that is certainly their prerogative.

It is a public record that Boeing tied as the largest donor for the 2000 Wichita school bond issue with a five figure donation and Raytheon was the largest corporate donor in support of the Local Option Budget property tax hike for Wichita during that 1997 property tax referendum. Cessna’s CEO Jack Pelton spoke out in support of the county’s spending plans that required this property tax hike August 9.

On the other hand, when the news cameras are generally gone, these aircraft companies return to the city or the county and seek sizable, often 100 percent property tax abatements. So a small or medium sized business gets to pay a much higher proportion of say $100,000 worth of their commercial property than the largest public businesses in this community. This is not fair.

This distorts the overhead costs shifting the fiscal burden from the taxpayer subsidized onto the businesses without the tax breaks. It also shifts this burden onto homeowners and other taxpayers. Special tax breaks provides the subsidized firms with lower overhead costs so they can afford pay more for employees too. That places small and medium sized firms that lack the political clout and leverage, at a hiring disadvantage as well. If the non tax abated firms have out-of-state competitors their extra overhead costs hurts their ability to compete. However, tax abatements are a big help in cyclical industries that are in perpetual “hiring and firing” cycles and need to pay more because of this employment instability.

There is certainly a need for qualified workers for many Wichita area businesses. This $40 million county spending hike, that is well above per foot construction costs, ignores a bigger question. How much spending in the government school establishment is enough? Property tax hike advocates are ignoring the fact that well over $3/4 billion in taxes are going to be spent on the 10 public school districts in this county in 2006-07. This figure is growing rapidly in the age of judicial edicts and Montoy.

2004 Census data indicates that Kansas has the 14th highest property taxes in all 50 states as well as the highest property taxes per capita in our five state region. Soaring appraisals have been the primary cause of this situation but the county’s rising mill levy without getting voter approval is an insult to every county voter. In 1997 almost 90 percent of county voters wanted to retain the property tax lid on local government. County officials helped kill the property tax lid in 1999 and now will not let voters decide this property tax hike at the ballot box. Creating a new level of local government in Sedgwick County with higher property taxes will hurt and hinder overall economic growth here.

06 Feb

Tax increment financing in Iowa

Bob Weeks

Writing from Cedar Rapids, Iowa

Readers of The Voice For Liberty in Wichita are well aware that I believe that when the government provides subsidies to businesses — either in the form of cash payments or preferential tax treatment — we create a corrosive business environment. Government picks winners and losers for political reasons, rather than letting the market decide which companies are doing a good job. Government also spends money inefficiently. Instead of letting the market decide where to best allocate capital, government chooses who receives capital taken from the people through taxation according to the whims of politicians spending other peoples’ money.

It is no wonder that government-favored enterprises rarely do well. Capital markets are quite efficient, and if there is an unmet need, capital usually flows to fill the need. The fact that capital is not flowing to fill a need strongly suggests that the need is not real. Yet, governments may feel that a need is not being met, and they will allocate taxpayers’ capital to fill it, even though taxpayers on their own do not select to invest in the subject project.

This practice is not limited to the State of Kansas. There is a paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” written by two economics professors at Iowa State University. (The paper may be read at http://www.econ.iastate.edu/research/webpapers/paper_4094_N0138.pdf.) This paper shows that despite the claims of politicians and the very obvious benefit to the companies that receive the TIF financing, there is no benefit to the state as a whole.

Following are some quotes from the paper’s conclusion:

“There are several issues to consider about TIF ordinances and TIF outcomes in Iowa. From our research here and from our larger study of the topic, it seems apparent that the ease with which TIF district designation can be done in Iowa, along with the multiplicity of uses that TIF districts can be put, that the law now has become a de facto entitlement for new industry and housing development in much of the state with little to no evidence of overall public benefit or meaningful discussion of the mean costs of the practice. It also seems apparent that given the ease with which these districts can be developed that many cities may be preemptively capturing new valuation and tax revenues in the name of economic development, but that in the main, this preemption is likely yielding much more collective fiscal harm across taxing districts in the long run than good.”

“City officials believe that the TIF action was instrumental in job growth in their town and in their region. How could it not be? We have an investment, and we have a firm with jobs. On net, however, except for the increment to manufacturing jobs, there is no evidence of economy wide benefits (trade, all nonfarm jobs), fiscal benefits, or population gains. There is indirect statistical evidence that this profligate practice is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.”

“This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. Though the TIF programs is highly popular among city government officials, and why wouldn’t it be given the growth in property tax yield over the years, there is virtually no evidence of broad economic or social benefits in light of the costs.”

05 Nov

Local economic development in Wichita

Bob Weeks

Writing from Memphis, Tennessee

Today’s Wichita Eagle (November 5, 2005) tells us of a new economic development package that our local governments have given to induce a call center to locate in Wichita. The deal is described as “one of the biggest the two-year-old economic development coalition [Greater Wichita Economic Development Coalition] has landed.”

There is an interesting academic paper titled “The Failures of Economic Development Incentives,” published in Journal of the American Planning Association, and which can be read here: www.planning.org/japa/pdf/04winterecondev.pdf. A few quotes from the study:

Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or 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 their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.

On the surface of things, to the average person, it would seem that spending to attract new businesses makes a lot of sense. It’s a win-win deal, backers say. Everyone benefits. This is why it appeals so to politicians. It lets them trumpet their achievements doing something that no one should reasonably disagree with. After all, who could be against jobs and prosperity? But the evidence that these schemes work is lacking, as this article shows.

Close to Wichita we have the town of Lawrence, which has recently realized that it as been, well, bamboozled? A September 29, 2005 Lawrence Journal-World article (“Firms must earn tax incentives”) tell us: “Even with these generous standards for compliance, to have 13 out of 17 partnerships fail [to live up to promised economic activity levels] indicates that the city has received poor guidance in its economic development activities.” Further: “The most disconcerting fact is that Lawrence would probably have gained nearly all of the jobs generated by these firms without giving away wasteful tax breaks.”

On November 6, 2005, an article in the Lexington (Kentucky) Herald-Leader said this:

The Herald-Leader’s investigation, based on a review of more than 15,000 pages of documents and interviews with more than 100 people, reveals a pattern of government giveaways that, all too often, ends in lost jobs, abandoned factories and broken promises.

The investigation shows:

Companies that received incentives often did not live up to their promises. In a 10-year period the paper analyzed, at least one in four companies that received assistance from the state’s main cash-grant program did not create the number of jobs projected.

A tax-incentive program specifically for counties with high unemployment has had little effect in many of those areas. One in five manufacturing companies that received the tax break has since closed.

There is spotty oversight of state tax incentives. The state sometimes does not attempt to recover incentives, even when companies don’t create jobs as required.

…

Unlike some other states, Kentucky makes little information about incentives public. The Cabinet for Economic Development refuses to release much of the information about its dealings with businesses, citing proprietary concerns. The cabinet has never studied its programs’ effectiveness, and it blocked a legislative committee’s effort to do so.

The Herald-Leader’s examination of Kentucky’s business-incentive programs comes when, nationally, questions are mounting about the effectiveness and legality of expensive government job-creation efforts. The U.S. Supreme Court is expected to decide by spring whether trading tax breaks for jobs is legal or whether they amount to discrimination against other companies.

Meanwhile, states continue engaging in costly economic battles for new jobs, even though research strongly suggests that few business subsidies actually influence where a company sets up shop.

We might want to be optimistic and hope that our local Wichita and Sedgwick County leaders are smarter than those in Lawrence and Lexington. Evidence shows us, however, that this probably isn’t the case. Our own local Wichita City Council members have shown that they aren’t familiar with even the most basic facts about our economic development programs. How do we know this? Consider the article titled “Tax break triggers call for reform” published in the Wichita Eagle on August 1, 2004:

Public controversy over the Genesis bond has exposed some glaring flaws in the process used to review industrial revenue bonds and accompanying tax breaks.

For example, on July 13, Mayans and council members Sharon Fearey, Carl Brewer, Bob Martz and Paul Gray voted in favor of granting Genesis $11.8 million in industrial revenue bond financing for its expansion, along with a 50 percent break on property taxes worth $1.7 million.

They all said they didn’t know that, with that vote, they were also approving a sales tax exemption, estimated by Genesis to be worth about $375,000.

It is not like the sales tax exemption that accompanies industrial revenue bonds is a secret. An easily accessible web page on the City of Wichita’s web site explains it.

But perhaps there is hope. The Wichita Business Journal has recently reported this: “The city and county are getting $2 back for every dollar they spent over the past 18 months on economic development incentives, according to an analysis of GWEDC-supplied data. The report was presented at Thursday’s GWEDC investor luncheon at the Hyatt Regency by Janet Harrah, director of the Center for Economic Development and Business Research at Wichita State University.” Personally, I am skeptical. I have asked to see these figures and how they are calculated, but I have not been able to obtain them.

18 Jun

Tax Abatements For All

Bob Weeks

Recently I wrote about the Mississippi Beef Plant (The Mississippi Beef Plant Has a Lesson For Us) and its spectacular costs to the taxpayers of Mississippi. I wondered if there were less spectacular failures that we didn’t know about because they weren’t reported in the news media. Failures in this context could mean a situation where the taxpayers have to make good on a bond or debt that the benefiting company didn’t pay, or it could mean a situation where the company doesn’t default, but fails to deliver on the promised economic development activity.

In an article in the June 15, 2005 Wichita Eagle titled Stalled Firms Keep Tax Breaks we learn of two failures of the second type. The two companies in question, The Coleman Company and McCormick-Armstrong, failed to deliver on their promises to add jobs in exchange for property tax abatements. Coleman, in fact, employs 114 fewer people than at the time the bonds were issued.

Why do governments grant companies tax abatements? It’s simple. When companies pay less tax, they have the opportunity to invest more. Tax abatements are tacit recognition that the cost of government is onerous and serves to decrease private economic activity and investment.

Shouldn’t we lower taxes for everyone, instead of only for the chosen few companies that are in a position to receive political favors from local governments?

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