Remarks to the Wichita City Council, October 20, 2009.
Mr. Mayor, members of the council,
I’m not here to speak as much to the specifics of the current case, but to the city’s policy of granting property tax exemptions and abatements, whether they are implemented through the economic development exemption program or through industrial revenue bonds.
At the same time we’re told we must build up our tax base, we tear it down. Nearly every week this council grants tax exemptions or abatements to companies that meet the criteria of the several programs the city uses.
These tax breaks are justified by benefit-to-cost analysis. I’ve been told that the modeling tools used to perform this type of analysis have no negative numbers in them, and that many people, myself included, believe that these tools are suspect.
But there’s also the simple recognition that when companies make capital investment, more economic activity happens. In the case before you today, benefit-to-cost ratios range from a scant 1.06 to one up to 9.70 to one, depending on the local governmental unit.
These numbers — especially the larger ones — sound like a good deal for citizens. But I think that what a lot of people may not realize is that the benefits to the various units of local government are in the form of the taxes they collect. After all, taxes are what constitute revenue to government. It’s not like a business making a capital investment and then gaining additional sales revenue. That represents, of course, voluntary transactions with their customers.
Or if a business makes a capital investment and becomes more efficient, its increased productivity is a benefit. More capital will be available for investment somewhere else.
Instead, the benefit to government is more tax revenue. That’s not really a benefit to citizens.
The broader question is this: If it’s good for the city and other local governmental units to give tax exemptions or abatements to Company A, what about granting them to Company B? And Companies C, D, E, and F? It’s almost like a perpetual motion machine: The more taxes we forgive, the more we gain.
Actually, the reality is not far removed. I spoke with Art Hall, Executive Director of the Center for Applied Economics at the University of Kansas. He suggested that we should grant all businesses an automatic property tax exemption for five years on new capital investment. That would generate a lot of new economic activity and jobs.
The city’s own analysis hints at this when it states “Granting an ad valorem property tax exemption will encourage the business to create new job opportunities and stimulate economic growth for the City of Wichita and Sedgwick County.”
The problem now is that a business and its capital investment must fit into a set of criteria in order to qualify for an exemption. There is a lengthy list of criteria. Some are objective. I am concerned that companies may find themselves formulating their capital investment plans so that they qualify for the tax exemption, rather than doing what makes the most sense economically for their unique situations.
Other criteria are subjective, and that opens the door for decisions to be made for political rather than economic reasons.
We have to wonder if these are the correct criteria. Are we smart enough to recognize the types of capital investment we want in Wichita? Have companies made investments, only to find they don’t qualify for tax breaks? Can very small businesses qualify? They create a lot of jobs, too.
There also the issue that the city has not always applied its own policies. There have been several cases where a company did not meet the promised performance goals at the five year review time, but the city continued the tax exemption contrary to policy. In the case of one company last year, Mr. Bell said “I don’t think it would be productive at this time to further penalize them … by putting them back on the tax roles at this time.”
In any case, if the city decides to forgo property taxes, the rest of the taxpayers in the city must step up to make the difference. This leads to resentment.
A solution is this: If the city grants a tax exemption of a certain amount, it should, at the same time, cut city spending by the same amount.
This would accomplish two goals. First, we’d be aware of the cost of granting these exemptions. Second, the rest of the taxpayers in the city — businesses, utilities, and homeowners — wouldn’t have to step up and pay the taxes that are exempted or abated.
That’s important because these parties engage in economic activity too. When they have to pay more tax, they have less to spend and invest.
Mr. Mayor and members of the council, instead of this city granting tax exemptions and abatements company by company, week by week, I urge that we consider a broad revision to our property tax policy that will stimulate investment across the city, for all businesses.
What will it take to engage the City Council? Mr. Weeks, you certainly made some thoughtful suggestions to the council and were asked not one question. There was no discussion on the matter and the abatement was unanimously approved.
Am I missing something here?
Bob did raise some good points, but it was really more of a philosophy and approach to business than the specific matter at hand. Until all cities are out of the public incentive game, no one city can afford to be out of the game. That said, the new manager, Layton, is much more astute than his predecessors about making sure it makes business sense for the city. I would hope that the council would take this discussion up some time.
[…] A report by the Kansas Division of Legislative Post Audit on the effectiveness of $1.3 billion spent by Kansas on economic development incentives is at Determining the Amounts the State Has Spent on Economic Development Programs and the Economic Impacts on Kansas Counties. Reporting from the Lawrence Journal-World is at Effect of economic spending in doubt. Readers of this site know that the effectiveness of economic development efforts by government is one of the issues I feel most strongly about. My recent testimony on this matter to the Wichita City Council is at Wichita universal tax exemption could propel growth. […]
[…] 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 […]
[…] subsidies to companies to induce them to locate in Wichita? No. Instead, as I’ve outlined in Wichita universal tax exemption could propel growth, we should offer preferential tax treatment to all new investment in […]
[…] Today’s discussion is another illustration of just how difficult it is to pick winners and losers, and how difficult it is to choose which companies the city should invest in. This is why I have recommended that Wichita grant tax abatements on all new capital investment. […]
[…] to companies nearly every week. I’ve shared my ideas with the council in testimony like Wichita universal tax exemption could propel growth and articles like Wichita’s economic development strategy: rent […]