Last week a Wichita company that’s expanding made an application for industrial revenue bonds and accompanying property tax abatements. The company’s application wasn’t timely, and for that reason is not likely to receive the requested help. The discussion surrounding the item provides insight into city council members’ ideas about the role of the city in economic development.
Industrial revenue bonds, or IRBs, are not a loan from the city, and the city does not make any guarantee that the bonds will be repaid. The primary benefit to the recipient of IRBs is that the property purchased with the bonds will generally be exempt, in whole or in part, from property taxes for some period. Also, the company may not have to pay sales tax on the property purchased with the bonds.
The agenda report for this item is at Request for Letter of Intent for Industrial Revenue Bonds, Michelle Becker, Inc. (District V).
In introducing the item, the city’s economic development chief Allen Bell said that because the project has already started construction, it falls outside the guidelines for the city’s IRB program. The construction is 85% to 90% complete.
A question by council member Sue Schlapp established that if the company had made application before the building was started, the application would have been approved as routine.
She also asked that if we approve this action today, will we have to go back and look at other businesses that are in the same place? Wichita City Manager Bob Layton asked that the council establish guidelines that if a project has already started, a project is not eligible for this type of assistance.
There was also some discussion about whether this company would move away from Wichita if the tax abatement was not granted. Since the building is already under construction, Bell said this is evidence that the company is intending to stay in Wichita. “It’s difficult to think of an incentive as something that’s given after the fact,” he said.
A question by council member Paul Gray established that there have not been many cases where companies have asked for tax breaks retroactively, according to Bell’s answer. Bell also said that he didn’t think that approving the current application would spur an avalanche of similar requests.
Gray also noted that we can create economic disparities between companies by granting incentives, so how do we justify doing this? Bell’s answer was that an important consideration is bringing business from out of state instead of taking business away from other local companies.
Layton added that an important consideration is whether the project can more forward without public assistance.
Council member Jeff Longwell remarked that “we really don’t have that many tools in our toolbox for emerging businesses.” Bell agreed.
In later discussion, Longwell said “I hate to penalize this emerging company … I should have got them in on this process long before we did and we wouldn’t even be having this argument. So I suppose I am at fault in part of this delay.”
Gray said that because we’re not competing against another community for this company — the normal use of incentives — he can’t support this application.
Council member Janet Miller said that the appropriate time to look at incentives is, as the manager said, when we think a company can’t move forward without the incentive. She also noted that we’re being asked to approve an action for which we’re going to soon have a policy against.
Schlapp, indicating a desire to approve the incentive, asked for justification: “We have a company here that doesn’t need an incentive but wants an incentive … can somebody justify that?”
Longwell said it’s not as simple as a need and a want. He said the applicant is a smart, well-managed company. But we shouldn’t use the qualifier of helping only the companies that couldn’t succeed without the city’s help. “Why not reward some some of those companies that are very well managed and run smart and have the ability to grow even more with our help than without it?” Again he referred to the lack of tools for emerging businesses. “We ought to be helping these types of companies that we think can truly prosper even more with our help … I think they fully warrant our help because they’re successful …”
Mayor Carl Brewer said that we have a proven track record of trying to help businesses and to get businesses to come to our area. He agreed with Longwell in that we need additional tools to use for economic development, as other communities have been competing successfully. We don’t have the same tools that other communities have, he said.
Longwell suggested the city visit with the applicant about her financing. He made a motion to defer this item. Council member Williams asked about the impending completion of the project, since it’s scheduled to be completed at the end of December. The answer from the manager was that with regard to IRBs, the project would not be eligible after it’s complete. The motion passed with Council member and Vice-mayor Jim Skelton opposed.
What’s striking about the discussion are these two things:
First, many council members and some city staff believe that the city doesn’t have enough “tools in the toolbox” for shoveling incentives on companies for economic development purposes. Evidently the ability to grant exemptions from property taxation — and not only the city’s property tax levy, but also that of the county, school district, and state — along with the ability to make outright gifts of money is not enough.
Second, many council members and some city staff believe that they can determine which companies are worthy of incentives.
According to city manager Layton, the city is going to revisit its economic development policies soon. This would be a good time for Wichita to come up with ideas that would benefit all companies, not only those that fall within guidelines that the council or city staff creates. My suggestion, explained in Wichita universal tax exemption could propel growth, is to give all new capital investment a tax abatement for a period of five years.
At the state level, there has been some discussion about the costs of tax abatements or exemptions. In a recent debate in Wichita, Kansas Secretary of Revenue Joan Wagnon used the term “tax expenditures” to describe these giveaways of the state’s income. The idea is that if the state (or other governmental body) didn’t create tax abatements or exemptions, revenue to the government would be higher. Her debate opponent Alan Cobb said it’s wrong to term these tax giveaways as “expenditures,” as the money belongs to the people first, a position I agree with.
There is the related issue of these tax abatements or exemptions really being appropriations of money that, if processed through the normal process of legislative hearings, etc., would be noticed for what they are. In Wichita city government we don’t have hearings quite like the Kansas Legislature, but the idea is the same: if this company had asked for a grant from the city for $22,253 (that’s the value of the first year of the requested tax abatement, with a similar figure for the following nine years, less $2,500 a year to the city for administrative fees), citizens — news media too — would quite likely look at this matter differently. Presented as industrial revenue bonds — just what are those anyway? — and a tax abatement, well, it all seems so … so innocent, so municipal.
A few more observations:
Council member Jeff Longwell’s confession of being at fault for the lateness of this company’s application should be remembered by voters in the next election, should he decide to seek to retain his current post, or — as some have told me — he seeks the mayorship of the city.
There’s also Longwell’s use of the term “reward,” in that the city should “reward some some of those companies that are very well managed and run smart.” I’d like to remind him and the rest of the council that the free enterprise system contains a very powerful reward mechanism for companies that do well: profit. That alone is sufficient.
Coverage from the Wichita Eagle is at Wichita City Council puts off tax breaks for accounting firm.
I was watching when this happened. We need to keep an eye on this one as Jeff Longwell could do some arm twisting when this comes back and get it approved because it is in his district.
There are reasons that city tax funds are being collected: to pay for community public services such as roads, sewage systems, weed and open area maintenance, police and fire services and other necessary costs of operating a city. Now if these can be privatized and paid for privately, which is possible, then we should do so, but if they are publically serviced then tax money must be spent to properly maintain this infrastructure. Any monies not used in the frugal maintenance of public properties is not the governments to use to function as pretend “venture capitalists.” That money belongs to the taxpayers who paid it in to use for whatever projects they have in mind. When we give gifts to businesses who are building then we shift the tax burden to the tax-paying citizens and companies. This same shift occurs with “not-for-profits” who are somehow more noble because they do not contribute to the tax base. Further, when businesses are building and expanding they put a heavier than normal load on the infrastructure. All this reduced level of maintenance and the cost of upkeep must be born by the other tax-paying entities, including retirees on fixed incomes as well as business owners who might also expand were it not for onerous taxation. It is not the role of government to pick the winners or losers in business to build political capital–that is absolutely immoral. It is the business of business investors and workers of all stripes to decide the proper use of their money and therefore which busniesses succeed or fail.
Corrections to above:
2. (Note to the venture capitalist point) Excess tax revenues that can be made “gifts” to business should lawfully be returned to the taxpayers.
3. By tax burden, I mean the responsibility for paying for the infrastructure which will either result in rising taxes or reduced levels of maintenance or a surplus of funds that should be returned to the taxpayers.
4. This also unfairly shifts the risk of business ventures to taxpayers who have not agreed to shoulder this risk. The businesses should have to apply to insurance companies with stockholders who have agreed to shoulder the risk.
5. Not for profits should probably bear more of the burden they create on the infrastructure.
Until everyone in the nation is out of the game of providing incentives, then Wichita needs to remain in the game. A number of good questions have been raised and deserve further thought. That said, this particular application doesn’t appear to have qualified for IRB funding anyway. Not every incentive or tool in the tool box is appropriate for every situation. A hammer doesn’t do any good when a saw is required.
Providing incentives is not a philosophical discussion for the council nor should it be. Incentives should be used when appropriate and when applicants meet qualifying criteria. In the past, too often applicants were not evaluated as to their abilities, financial resources, management, etc. I would expect the new manager to implement policies that help reduce the risk to the public and to assure that incentives when used are used wisely and to the benefit of the city.
Pat if we are going to remain in the incentive business we should do as BOB suggests implement a Wichita Universal Tax
Incentive. After all what educational experience do Council members have to pick and choose the winners and losers for Tax Abatement.
I think you all missed the real point to this exchange. Nearly every Council member supported helping only the businesses that need help. One thing I learned in business if you don’t have what it takes to get started you sure as heck don’t have what it takes to weather the tough times. Any time you help a renter or home buyer get into a home you can bank on the fact you are going to have to help them all the way. Part of the process for starting a new business is funding, resources, planning, and execution. You notice there is no “beg for public assistance” in this list.
No, I think I understand exactly what is happening, said, implied, intimated, yada, yada. If an alternative such as Universal Tax Incentive is someone’s agenda, then promote it in a productive and meaningful way as a viable alternative and solution to the economic tools that the city utilizes today. But that is not the case here, not on a Libertarian blog.
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