The video is presented in three sections. The material in the first section is different from the way TIF districts work in Kansas, but the other two sections are very similar to the way the law works in Kansas.
At the start of part 3 (“Problems with TIFs”) the narrator states the problem succinctly: “Tax increment financing negatively affects everybody’s property tax bill by taking the tax revenue from increased taxable valuations on the properties in the TIF areas and putting that into TIF accounts.”
She then presents an illustration showing how the property taxes for non-TIF properties have to rise to make up for the fact that taxes from TIF properties do not go towards paying for city, county, or school district services. While Wichita doesn’t use the term “TIF accounts” as used in this video, the economic effect is the same.
The video also mentions politically-favored developers being the beneficiaries of TIF districts, specifically mentioning “a friend of the city who might own property that is struggling.” I wonder: is the North Dakota Policy Council aware of the situation in Wichita, where many feel that the city is bailing out Real Development (also known as the “Minnesota Guys”) by not only granting TIF financing to them, but increasing the amount of TIF financing against the recommendation of its independent consultant?
Longwell and Miller — the rest of the council too, for that matter — are aided by newspaper reporters like the Wichita Eagle’s Bill Wilson, who is dismissive and hostile towards free markets and those who advocate for them, calling reliance on markets “intellectually shallow” and a “thin ideological argument.”
This Friday the Wichita Pachyderm Club features as its program Doug Kupper, who is Director of Parks and Recreation for the City of Wichita.
All are welcome to attend Pachyderm club meetings. The program costs $10, which includes a delicious buffet lunch including salad, soup, two main dishes, and ice tea and coffee. The meeting starts at noon, although it’s recommended to arrive fifteen minutes early to get your lunch before the program starts.
The Wichita Petroleum Club is on the ninth floor of the Bank of America Building at 100 N. Broadway (north side of Douglas between Topeka and Broadway) in Wichita, Kansas (click for a map and directions). Park in the garage just across Broadway and use the sky walk to enter the Bank of America building. Bring your parking garage ticket to be stamped and your parking fee will be only $1.00. There is usually some metered and free street parking nearby.
Talk that low-cost carrier Southwest Airlines might enter the Wichita market has the usual cast of government bureaucrats, centralized planning advocates, and their boosters in a tizzy.
(Oops. White actually used the word “incentives,” not “subsidies.” There are some who believe there is a difference in meaning between the two words. These are the types of nuances you have to become comfortable with when politicians and government bureaucrats try to direct and control economic development.)
Holman’s editorial makes a case for subsidizing another low-cost airline at Wichita’s airport, citing some remarkable economic development statistics:
Two recent studies supported the view that Southwest would build on the current affordable airfares program in leveraging low fares and boosting ridership at Mid-Continent — forecasting 33.5, 37 and 39 percent increases in airport activity and 7,000 additional direct and indirect jobs over such a carrier’s first three years in Wichita, as well as $29.5 million annually in savings for travelers.
As I pointed out a few weeks ago, these numbers are not believable. As I wrote two weeks ago, while more air service options are good for Wichita travelers, we need to be suspicious of the lofty claims of thousands of jobs and huge economic impact like the numbers claimed in this case. A few years ago I reported on a whopper of a economic impact figure given for the Wichita airport. It turned it the figures was based on some unrealistic assumptions, and used numbers likely to be counted a second time as part of someone else’s economic impact.
In the present case, the claim of 7,000 jobs to be created is a very large number. According to figures provided by the Greater Wichita Economic Development Coalition, only one company in the greater Wichita area has over 7,000 employees. The company with an employee count nearest 7,000 is Cessna, with about 6,000 employees.
Can anyone seriously claim that adding one more airline to the many already serving Wichita will result in the addition of more jobs than what exists at Cessna?
This is particularly true in that while there is one (or maybe two, depending on your definition) low-cost airlines receiving subsidies to serve Wichita, the other major airlines pretty much meet the discounters’ prices. This was the rational for bringing a low-cost airline to Wichita: by bringing in even one, it would force all other airlines to lower their fares.
This goal being largely achieved, it’s hard to fathom that adding one more discount airline would have a huge impact.
These economic development studies deserve scrutiny, and not just by eco-devo boosters and their cheerleaders who believe the government should heap money on anyone or anything that hints they might locate in Wichita — or leave Wichita. I asked Jeremy Hill of Wichita State University’s Center for Economic Development and Business Research if I could see the study that purportedly supports paying for more airline service. He, citing a non-disclosure agreement, would not send me the report or comment on its content. So I have a request pending at city hall.
There’s another angle to this story that hasn’t been reported in the Wichita Eagle news stories and editorials: Charleston was able to obtain Southwest Airlines service without paying a subsidy. The State, South Carolina’s largest newspaper and owned by the same McClatchy Company that owns the Wichita Eagle, reports that there was a lot of wooing, but there were no economic incentives.
In the Charleston situation, there evidently won’t be the massive state-supplied subsidy as we have in Kansas. But Southwest will still get a leg up: A USA Today story quotes a Charleston airport official saying “Southwest didn’t want a state subsidy, but was interested in the airport’s incentives a temporary waiver of landing fees, up to $10,000 to market new flights, and up to $150,000 for other start-up costs.”
Correction: The Wichita Eagle reported in its May 13 article that Southwest service in Charleston is not contingent of state subsidies.
Susan Estes, AFP Field Director and John Todd, AFP Volunteer Coordinator will lead the meeting, whose topic is “Local government economic development incentive tools with particular emphasis on the proposed Bowllagio STAR bonds project.”
The meeting is from 7:00 pm to 8:30 pm on Monday, May 17. The location is the Alford Branch Wichita Public Library (private meeting room), at 3447 S. Meridian.
For more information, 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
Reports that Southwest Airlines may be considering adding service in Wichita have lead to enthusiasm for the economic development that this service would add.
While more air service options are good for Wichita travelers, we need to be suspicious of the lofty claims of huge jobs and economic impact like the number claimed in this case.
In particular, 7,000 jobs is a very large number. According to figures provided by the Greater Wichita Economic Development Coalition, only one company in the greater Wichita area has over 7,000 employees. The company with an employee count nearest 7,000 is Cessna, with about 6,000 employees.
Can anyone seriously claim that adding one more airline to the many already serving Wichita will result in the addition of more jobs than what exists at Cessna?
These economic development figures need to be looked at closely. In 2005, I noted in the article Stretching figures strains credibility that the Center for Economic Development and Business Research has overstated the case before. In particular, the center included all the employees of Cessna and Bombardier in calculations of the economic impact of the Wichita airport:
By reading this study I learned that the employees of Cessna and Bombardier — 12,134 in total — are counted in determining the economic impact of the airport. Why? To quote the study: “While it might appear that manufacturing businesses could be based anywhere in the area, both Cessna and Bombardier require a location with runways and instrumentation structures that allow for flights and flight testing of business jet airplanes.” This is true, but it is quite a stretch to attribute the economic impact of these employees to the airport.
For one thing, if we count the economic impact of the income of these employees as belonging to the airport, what then do we say about the economic impact of Cessna and Bombardier? We would have to count it as very little, because the impact of their employees’ earnings has been assigned to the airport. This is, of course, assuming that we count the impact of these employees only once.
Or suppose that Cessna tires of being on the west side of town, so it moves east and starts using Jabara Airport. Would Cessna’s economic impact on Sedgwick County be any different? I think it wouldn’t. But its impact on the Wichita airport would now be zero. Similar reasoning would apply if Cessna built its own runway.
The mayor disagreed with those who have appeared at city council meetings to testify against the use of TIF. He told of how the city called mayors’ associations and the National League of Cities, and they said that most large cities use incentives. He learned that cities use some incentives that that Wichita has not yet heard of, which undoubtedly will give city staff some additional tools in the toolbox in the future.
He said “Incentives are available, and we’re on the right track.”
He said that in a recent meeting of mayors he attended, he learned that the mayors of other cities are trying to figure out how to use incentives and recruit business. They’re not turning their backs on incentives, he said, adding that “What we’re doing is nothing new.”
He told the audience that “We as a city are going to have to endure change, and we as a city are going to have to understand any time there’s change, there is going to be some pain.”
He added that he appreciated input from those who oppose the various subsidies and incentives the city gives to developers, and the city did check to see if the information they provided to the city was correct.
Commentary
The National League of Cities, one of the organizations the mayor consulted with regarding the use of incentives for the purpose of economic development, promotes an expansion of the powers of cities to engage in taxpayer-funded economic development subsidies. Its mission statement sounds noble: “Its mission is to strengthen and promote cities as centers of opportunity, leadership, and governance.” But citizens should not be deceived. It promotes interventionist practices rather than economic freedom. An example is its celebration of the U.S. Supreme Court decision in Kelo v. City of New London, which the Wall Street Journal described as “one of the worst in recent years, handing local governments carte blanche to seize private property in the name of economic development.”
The mayor’s refusal to embrace economic freedom — which he has described as a “philosophy” that is not viable in the real world — means that Wichita is likely to continue to engage in the same competitive practices as do almost all other cities. It means that deals like the subsidy granted to Real Development is a template for other taxpayers-funded giveaways. As Council Member Paul Gray has warned, the plans for the redevelopment of downtown Wichita are likely to require many millions — perhaps hundreds of millions of dollars — of public assistance or investment. Since there isn’t enough tax increment financing available to pay for this, we can expect to see proposals for tax increases, such as a new city sales tax of perhaps one cent on the dollar, to pay for downtown redevelopment.
What Wichita is missing out on is a way to truly distinguish itself from all the other cities and counties that are all using the same economic development tools. Presently about all we can do is offer subsidies that are larger than what other cities offer. But if we decided to forgo the use of the usual economic development subsidies and incentives, that would be something very unusual. It could really put Wichita on the map as a place to locate to.
Since these economic development incentives and subsidies require other taxpayers, both individuals and businesses, to pay for their cost, Wichita could reduce the cost of doing business in Wichita for everyone. A company considering locating to Wichita could be confident that it would be operating in a low-tax environment. It wouldn’t have to hope that it fits into the city’s economic development policy guidelines. It wouldn’t have to hope that politicians and bureaucrats view its application favorably.
Further, once a company locates here, it wouldn’t have to worry that other companies will receive incentives and subsidies that it will have to pay for. It would not need to worry about the other costs that subsidies impose, such as subsidized companies having lower overhead and are therefore better able to compete for employees.
Eliminating interventionist policies from city hall could have other benefits. Is there a “good ‘ol boy” network of insiders that use Wichita city hall as their personal piggy bank? By eliminating the practice of granting incentives and subsidies, we could reduce or eliminate the cynical attitude of many citizens towards city government.
We wouldn’t have to worry whether the campaign contributions made by those seeking favor from city hall were made in the interest of good government, or made in the hopes of getting a TIF district or other subsidy passed through the council.
These ideas, however, are not seriously considered by the mayor or any city council members, at least to my knowledge. Instead, we in Wichita are doomed to finance an escalating economic development arms race. The economic freedom of Wichitans will decline.
This is noteworthy in light of the mayor’s curious assertion in his remarks that we will have to “endure pain” caused by change. We’ve changed nothing.
The item, which appeared on the consent agenda, was the second reading for the ordinances that authorize the Exchange Place Project, including the expansion of its tax increment financing district.
(A consent agenda is a group of items that will be voted on in bulk with a single vote. An item on a consent agenda will be discussed only if a council member requests the item to be “pulled.” If that is done, the item will be voted on separately. Generally, consent agenda items are considered by the city to be non-controversial, but that is not always the case.)
Council Member Lavonta Williams wanted to know more about the change to the parking plan. On Saturday reporting by the Wichita Eagle’s Brent Wistrom told of how the number of parking spaces that will be available to the public has declined as the project plan has evolved: “Now the proposed garage near Douglas and Market would have only 64 spaces saved for public parking. That’s down from 103 promised earlier this month, which was down from the 149 projected in March. Meanwhile, the number of spaces reserved for apartment tenants increased from 195 to 209.”
The availability of additional public parking spaces in downtown was one of the major reasons cited by city council members as a reason for approving the Exchange Place project.
Assistant City Manager Cathy Holderman asked Pat Ayers, a former Key Construction executive, to respond to the question. He said that the unique aspects of the proposed garage actually increased the number of parking spaces available during the work day, as residents of the apartments drive their cars to work.
Is this a deviation from what was originally planned, asked Williams? Yes, was the reply from Ayers.
Vice Mayor Jeff Longwell asked Holdeman about a safeguard in place for this project, a ten percent “retainage.” Ayers replied that this provision is in effect for this project. But Council Member Paul Gray said a retainage is common to construction contracts, and that it simply ensures that the contractor completes the job, not the sustainability of the project.
There was mention of the fact that payments will be made directly to vendors, not to Real Development, the developers of the project. This is a reminder of the peculiar arrangement where the city is placing a huge bet of the success of downtown Wichita redevelopment in the hands of the principals behind Real Development, but evidently we don’t trust them enough to write them a check and be confident they will pay their bills.
The measure passed with Gray and Jim Skelton voting against the measure, as they did last week.
Last week’s meeting of the Wichita City Council featured a message from Council Member Janet Miller that illustrated her firm belief in centralized government planning for the purposes of economic development. It also contained a material mistake in the understanding of the facts of the project.
In her remarks from the bench, Miller disagreed with those who testify at council meetings against tax increment financing (TIF). She said there is much information that says this type of economic development incentive is effective.
She said “Sometimes I wonder what city folks are living in when they talk about the negative, or the lack of results from TIFs.” She then named several Wichita TIF districts that she said performed well.
If her remarks were aimed at me and some of the other people who have testified at city council meetings against the formation of TIF districts, council member Miller may not have been listening very carefully. We do not deny that TIF districts produce results — within the district itself. Things get built, buildings get renovated. It is the effect of TIF on the city as a whole that we are concerned with.
It’s also the unobserved effects — the things that don’t happen because Wichita props up developers in politically-favored areas such as downtown. This form of centralized planning from Wichita city hall overrides the decisions that the citizens of Wichita make with their own pocketbooks, and concentrates power in the hands of bureaucrats and politicians.
As Randal O’Toole has written: “TIF today is often part of a social engineering agenda that Americans should reject.”
Miller praised the amount of office space Real Development has brought online in downtown Wichita. To the extent that this has been done without government assistance, this should be praised.
She agreed with Vice Mayor Longwell’s assessment of this project, saying “This is not a tax abatement project.” She is just as wrong as is Longwell and other council members who believe this.
In discussing the risk involved in this project, Miller told of how the disbursements from a HUD-guaranteed loan that will finance much of this project will made directly to contractors, not to Real Development. City of Wichita documents indicate that the City’s payments will be made in the same way. This is a quite peculiar arrangement: we are placing a huge bet of the success of downtown Wichita redevelopment in the hands of the principals behind Real Development, but evidently we don’t trust them enough to write them a check and be confident they will pay their bills.
Miller also spoke of the jobs that will be created by this project. Implicit in her argument is that this project, or something similar, would not occur without the city’s subsidy. Her argument also ignores what economists tell us — that TIF districts simply transfer development from one part of town to another.
What Wichitans should be most concerned about, however, is a misstatement by Miller that other council members may have relied on in making their decision on how to vote. Miller said: “The property tax increases, the increment that’s being calculated in this project, includes only the buildings in this project.”
This statement directly contradicts the facts. In the Longhofer study, other properties owned by Real Development — the Petroleum Building, Sutton Place, 105 S. Broadway, and others — are used to support the TIF loan for the Exchange Place project. In response to my question, Wichita’s urban development director Allen Bell confirmed the same.
In her message from the bench, Miller said that city staff and council members have had enough time to go over this proposal. Her mistaken remarks indicate, however, that the project is still not understood very well by the council, neither its mechanics or its economic effect.
He said tax revenues will increase from $28,000 to half a million dollars, repeating that it is not a tax abatement.
So is it true that TIF is not a tax abatement?
A little background: The Wichita City council grants property tax abatements regularly as part of its Industrial Revenue Bond program. In the IRB program, the city is not the lender of funds, and it does not guarantee that the bonds will be repaid. Instead, the benefit of the IRB program is that the applicant won’t have to pay property tax on property purchased with the bond money. This abatement is generally granted for a period of ten years, although it is reviewed after five years to see if the company is fulfilling the promises it made to justify the tax abatement. In addition, a sales tax exemption may be granted on the property purchased with the bond money.
Confused? Many people are. A few weeks ago the city issued IRBs to a Wichita movie theater operator. Comments left at various online forums often argued that the city should not be lending money to the theater and its controversial ownership group. But as we’ve seen, the city is not making a loan. Instead, the IRB program is simply a vehicle that is used to grant relief from paying property taxes to the city, county, and school district.
So the IRB program, despite its name, is a tax abatement program. What about tax increment financing, then?
Under TIF, a district is formed. The property taxes being paid by a property in the district at the time of formation is noted and called the base. Usually this property is blighted or run-down, so this base is a very low value.
Then a development plan is created, perhaps to build apartments or a shopping center. Based on that plan and the property taxes that the completed project will likely pay, the city will borrow money and give it to the developers.
After the project is completed, the tax appraiser notices that there’s something new and valuable where there wasn’t before, and he levies a higher tax bill on the property. The difference between the original taxes — the base — and the new taxes is called the increment.
Under normal conditions when new property comes on the tax rolls, the tax revenue is used to provide public services such as police and fire protection. The school district is usually a recipient of a large portion of the new tax revenue, which might be used to pay for the schooling of residents of the new apartments, for example.
But in a TIF district, what happens to this new tax revenue — the increment?
Recall that the city borrowed money and gave it to the developers. The new property taxes — the increment — is used to pay off these bonds.
So council member Longwell is correct, in a way. Real Development will pay increased property taxes.
But when these increased taxes are used to pay off bonds that exclusively benefit Real Development, how is this any different from not paying property taxes?
Consider development not in a TIF district. Developers generally borrow money. Then they have to make loan payments and higher tax payments.
But TIF developers pay only higher taxes. There are no loan payments, as their increased property tax payments are used to pay off the loan.
So when considering the total economic reality, council member Longwell is wrong. Several other council members have the same mistaken belief.
Tax increment financing is a tax abatement in disguise. Actually, it’s worse than that. Tax abatements granted in the IRB program don’t require the city to be on the hook for a loan. But in a TIF district, the city is the lender, and city taxpayers are liable if the TIF district doesn’t perform up to projections. This has happened in Wichita, and taxpayers had to pay in one way or another.
Why is Longwell, now Wichita’s vice mayor, unable to grasp these facts? Perhaps he does but chooses to ignore them. He has a reason to do so. Downtown Wichita real estate developers — let’s be clear: developers who seek public subsidy instead of working to meet market demand — are generous with campaign contributions, funding both political liberals like Wichita city council member Janet Miller and self-styled fiscal conservatives such as Longwell.
Longwell’s term expires next spring, and he may choose to run for his same office or even the mayor’s office, as some political observers have speculated.
Longwell has already drawn one challenger for his city council position, tea party activist Lynda Tyler. While lacking experience holding elective office, Tyler has well-established conservative credentials and can be expected to run a vigorous and well-funded campaign.
Longwell, who along with Wichita Mayor Carl Brewer complains that Wichita doesn’t have enough “tools in the toolbox” for dishing out economic development incentives to politically-connected city hall insiders, will have to explain his actions to voters in his largely conservative west-side district.
Someone should ask him if he really understands the economic reality of tax increment financing districts.