A lesson for Wichita in economic development

When a prominent Wichita business executive and civic leader asked for tax relief, his reasoning allows us to more fully understand the city’s economic development efforts and nature of the people city hall trusts to lead these endeavors. From June 2014.

In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This application is of more than usual interest as the company’s CEO,

High Touch, Wichita, Kansas.
High Touch, Wichita, Kansas.
Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce. The Chamber, along with its subsidiary Greater Wichita Economic Development Coalition, are the main agencies in charge of economic development for the Wichita area. Under Chambers’ leadership, these organizations are recommending that the city council authorize a vote on raising the Wichita sales tax for the purposes of economic development.

Let’s take a look at some of the aspects of this company’s application and the city’s agenda packet material (available here).

In its application letter, High Touch argues as follows (emphasis added):

To demonstrate our commitment to Wichita, as well as accommodate our expected growth plans, High Touch Technologies would like to purchase a 106,000 sq. ft. building in Downtown Wichita.

At this time, High Touch Technologies is requesting your support for the issuance of approximately $2,000,000 City of Wichita, Kansas, Taxable Industrial Revenue Bonds. High Touch greatly appreciates any support we can receive on the purchase of this office building through the City’s participation of Industrial Revenue Bonds and the property tax savings associated with this financing method. We intend to continue our growth and expansion over the next several years and these benefits would be helpful in offsetting the substantial capital requirements associated with this project.

High Touch Technologies believes in Wichita and support the community and its economy through corporate stewardship programs. We look forward to working with you and Members of the Council on this project and are always available to answer questions regarding this project or any of our business activities.

Later in the letter:

The applicant agrees to enter into an agreement for Payment in Lieu of Taxes (PILOT) equal to the ad valorem property tax payment amount for the 2013 tax year. The applicant respectfully requests that the payments be capped at that rate for a period of ten (10) years. The tax abatement will permit the applicant to proceed with the anticipated project, allow for its anticipated growth, and result in the public benefits otherwise outlined herein.

The issuance of Industrial Revenue Bonds will be used to lower the cost of office space in the acquired building. The lower costs will give High Touch, Inc. incentive to grow its presence in the corporate office in Wichita. New employees will be added to this Wichita office instead of other offices across the U.S. The savings in office space will allow High Touch, Inc. to use those savings for expansion.

Some remarks:

To demonstrate our commitment to Wichita: This is ironic because High Touch is asking to be excused from paying the same property taxes that most other people and business firms have to pay. Instead of commitment, this demonstrates hostility to the taxpayers of Wichita, who will have to pay more so that this company can pay less.

chutzpa definition 2But that irony is surpassed by the spectacle — chutzpa — of the incoming chair of a city’s chamber of commerce threatening to move his company out of the city unless the company receives incentives.

helpful in offsetting the substantial capital requirements: Well. Who wouldn’t appreciate help in offsetting the cost of anything? We should categorize this as unpersuasive.

corporate stewardship programs: Underlying this argument is that because High Touch makes charitable contributions, it should be excused from the same tax burden that most of us face. Here’s a better argument: Be a good corporate citizen by paying your fair share of taxes. Don’t ask for others to pay your share of taxes. That will let citizens make their own charitable contributions, instead of subsidizing what Wayne Chambers want to do.

Cronyism in Wichita - High Touchanswer questions regarding this project or any of our business activities: This refers to how the members of the city council will make a judgment that this business is worthy of subsidy, and that others are not. 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 demonstrated that it is through markets and their coordination of dispersed knowledge that we best learn where to direct capital investment. It is simply impossible for this city government to effectively decide in which companies Wichitans should invest their tax dollars. Nonetheless the city council made the decision, and it wants a larger role.

Payment in Lieu of Taxes (PILOT): High Touch is not proposing to totally escape its tax burden. Only partially so, through the PILOT. But the proposed payment is quite generous to the company. A few quick (and probably imprecise) calculations shows how small the PILOT is compared to what taxes would be. City documents indicate the proceeds of the IRBs will be used to pay for $2,000,000 of improvements. This amount of commercial property times 25% assessment ratio times 120.602 mill levy rate equals $60,301 in taxes. High Touch, through the PILOT, is proposing to pay $33,250, just a little more than half of what the taxes might be.

But the true value of the taxes being avoided is probably much higher. As an example, nearby office space is listed for sale at $28 per square foot, and that’s a distress-level price. Applying that price to this building, its value would be almost $3 million. If we look at market capitalization rates, which are generally given as from nine to eleven percent for class A space, we arrive at a much higher value: If we say $10 per square foot rental rate times 106,000 square feet at nine percent cap rate, the value would be almost $12 million. Taxes on that would be about $300,000 per year.

Wichita Chamber of Commerce 2013-07-09 004These are back-of-the-envelope calculations using assumed values that may not be accurate, but this gives an idea of what’s actually happening in this transaction: High Touch is seeking to avoid paying a lot of taxes, year after year. But by offering to pay a small fraction as PILOT, the company appears magnanimous.

payments be capped at that rate for a period of ten (10) years: High Touch proposed that what it’s paying in lieu of taxes not be subject to increases. Everyone else’s property taxes, of course, are subject to increases due to either assessed value increases or mill rate increases, or both. High Touch requests an exemption from these forces that almost everyone else faces.

lower the cost of office space: Again, who wouldn’t enjoy lower business or personal expenses? The cost of this incentive spreads the cost of government across a smaller tax base than would otherwise be, raising the cost of government for almost everyone else.

added to this Wichita office instead of other offices across the U.S.: The threat of relocation or expansion elsewhere is routinely used to leverage benefits from frightened local governments. These threats can’t be taken at face value. There is no way to know their validity.

use those savings for expansion: Implicit in this argument is that Wichita taxes prevent companies from expanding. True or not, this is a problem: If taxes are too high, we’re missing out on economic growth. If taxes are not too high, but some companies seek exemption from paying them nonetheless, that’s a problem too.

A prosperous company, establishing the template for seeking business welfare

In a December 2011 interview with the Wichita Eagle, the High Touch CEO bragged of how well the company is doing. The newspaper reported “Ask Wayne Chambers how business is, and he’s going to tell you it’s good. Very good. … Chambers said this week that after two years of robust growth, he’s looking for another one in 2012. ‘We have every reason to believe we’ll continue that growth pattern,’ he said.”

In February 2013 the Wichita Business Journal reported “It should be a great year for High Touch Inc. That’s the initial prediction of CEO Wayne Chambers, who says actions the company took during and leading up to 2012 have positioned High Touch to become a true ‘IT solutions provider.'”

If we take Chambers at his word — that his company is successful — why does High Touch need this business welfare? Economic necessity is usually given as the justification of these incentives. Companies argue that the proposed investment is not feasible and uneconomic without taxpayer participation and subsidy. I don’t see this argument being advanced in this case.

Wichita and peer per capita income, Visioneering

Interestingly, at the time of this application Chambers was co-chair of Visioneering Wichita, which advocates for greater government involvement in just about everything, including the management of the local economy. One of the benchmarks of Visioneering is “Exceed the highest of the annual percentage job growth rate of the U.S., Omaha, Tulsa, Kansas City and Oklahoma City.” As shown in this article and this video, Wichita badly lags the nation and our Visioneering peer cities on this benchmark. Visioneering officials didn’t want to present these results to government officials this year, perhaps on the theory that it’s better to ignore problems that to confront them.

Now Wayne Chambers is the chair of the Wichita Metro Chamber of Commerce. Under his leadership, the Chamber of Commerce recommends that Wichitans pay higher sales tax to support the Chambers’ projects.

Will this blatant cronyism be the template for future management of economic development in Wichita? Let’s hope not, as the working people of Wichita can’t tolerate much more of our sub-par economic growth.

Governor Brownback to veto tax hike

IMMEDIATE RELEASE
June 6, 2017

For more information:
Melika Willoughby
785.368.7138
[email protected]

Governor Sam Brownback issues statement on legislative tax hike

Topeka – Governor Sam Brownback today issued the following statement regarding Senate Bill 30:

“I appreciate the efforts of legislators as they continue to work towards balancing the budget, building a school funding formula that puts students first, and ultimately closing out the 2017 legislative session.

“Given that this tax package was assembled and passed just today, I hope to avoid any unnecessary delays by announcing that I will veto Senate Bill 30, allowing the legislature sufficient time to address its many deficiencies and harmful impacts on Kansas families. We have worked hard in Kansas to move our tax policy to a pro-growth orientation. This bill undoes much of that progress. It will substantially damage job creation and leave our citizens poorer in the future.

“Earlier this year, I vetoed a tax increase that threatened to crush the Kansas economy, punishing individual Kansans and their families. Today, with Senate Bill 30, the legislature is looking to hike rates on Kansans even higher. Senate Bill 30 is a $1.2 billion tax hike, making it the largest in state history. This is bad for Kansas and bad for the many Kansans who would have more of their hard-earned money taken from them.

“Additionally, this tax increase is still retroactive and will affect individual families and small businesses in the 2017 tax year. Retroactively applying new taxes in the middle of the year is irresponsible and will harm families and individuals who are working to make ends meet.

“The people of Kansas deserve clarity in understanding how this bill will impact their families:

  • Senate Bill 30 is the largest tax increase in state history.
  • This bill hikes taxes $1.22 billion over two years, compared to the previously vetoed $1.04 billion tax hike in HB 2178.
  • Low-income Kansans will be hit hardest because the low-income exclusion is cut in half.
  • The bottom bracket marginal tax rate will increase by 14.8%.
  • The middle bracket marginal tax rates will increase by 14.1%.
  • The top bracket marginal tax rate will increase by 23.9%.
  • Small businesses will lose their exemption for non-wage business income, instead paying up to 5.7% as they strive to create jobs and economic growth.

“Instead of imposing draconian tax increases on Kansas families, we must enact a pro-growth tax policy. Many alternative ideas have been discussed, and I believe there is a better solution. I have made many proposals, and several ideas have been considered by the legislature. We can and we must balance our budget without negatively harming Kansans.

“Once again, I remain committed to working with the legislature to develop a plan that balances our budget without permanently harming hard-working Kansans. Senate Bill 30 and its $1.2 billion tax hike is not the solution, and I will veto it for the sake of Kansas workers, Kansas families, and Kansas job creators.”

Regulation in Wichita, a ‘labyrinth of city processes’

Wichita offers special regulatory treatment for special circumstances, widening the gulf between the haves and have-nots. From June 2016.

The Wichita Eagle reports that part of what the City of Wichita is offering to Cargill as an inducement to stay in Wichita is regulatory relief.1 In particular:

The city has offered smaller incentives to Cargill as well, including an ombudsman.

[Wichita assistant city manager and director of development Scot] Rigby called the ombudsman something of a project manager.

“They’ll just call one person,” Rigby said of Cargill’s dealings with the city. “It’s a way to eliminate … a business trying to figure out, how do I get through the labyrinth of city processes?”

Rigby said the city has done this with other companies, such as Spirit AeroSystems and JR Custom Metal Products, and would do it for any company with an expansion or project that needs streamlining.

He said the city also is committed to work with the state and the Greater Wichita Partnership to create a talent recruitment position that could help Cargill and other companies recruit employees at all levels.

The city has said it would offer a 15-day turnaround instead of the customary 30 days for plan review and permits, along with a 50 percent reduction in plan review, utility and building permit fees.

Let me repeat the highlights:

labyrinth of city processes

streamlining

15-day turnaround instead of the customary 30 days

50 percent reduction in … fees

All of this is an explicit admission that City of Wichita regulations are burdensome. If not, why would the city devote time and expense to helping Cargill obtain relief from these regulations?

Further: Why do we have these regulations? If the purpose of the regulations is to protect people from harm, how can we relax or streamline them for the benefit of a few companies? Wouldn’t that expose people to the harm the regulations purportedly prevent?

What’s even worse is this: Cargill is a large company with — presumably — fleets of bureaucrats and lawyers trained to deal with burdensome government regulation. These costs can be spread across a large company. Meaning that Cargill can afford to overcome burdensome regulations.

What about the small companies that don’t have fleets of bureaucrats and lawyers? That can’t spread the costs of burdensome regulation across a large volume of business? What will the city do for these companies? This is especially important because the spirit of entrepreneurship the city wants to cultivate is most commonly found in small, young, companies. The type without fleets of bureaucrats and lawyers.

Well, the city says it would do for any company what it is doing for Cargill.

Except: How are companies supposed to know to ask for regulatory relief, streamlining, and a discount on fees?

And is it equitable to offer special companies special regulatory relief when it is not readily available for all?

Business Perceptions of the Economic Impact of State and Local Government Regulation coverLast year Kansas Policy Institute, in collaboration with the Hugo Wall School of Public Affairs at Wichita State University produced a report titled “Business Perceptions of the Economic Impact of State and Local Government Regulations.”2 On the city’s offer of special treatment to one company, KPI Vice President and Policy Director James Franko commented:

This bears out one of the key findings from a paper we did with WSU’s Hugo Wall School: Companies want transparency and simplicity in the local regulatory environment. Businesses are not as concerned about the regulation themselves as they are in navigating what the city admits is a “labyrinth” of regulations and processes.

The regulatory process should be simplified for all businesses, not just a few. Hopefully there is a realization that an “ombudsman,” or better yet a transparent, straightforward regulatory regime, should be available to anyone wanting to start or grow a business in Wichita.

Instead of the city offering regulatory relief on an as-needed, as-requested basis, why not simplify and streamline regulation for everyone? That seems to make a lot of sense. But if you were a city politician or bureaucrat, this isn’t in your best interest. If regulations are burdensome, and you — as a bureaucrat or officeholder — can offer relief, then you have power. You become important. You have the ability to grant favors and make people feel special.

But if regulations were streamlined and reformed for everyone as the city will do for Cargill, then bureaucrats and politicians would not be so powerful and important. But the people would be more free and prosperous. Think about that trade off.

An interview with James Franko of Kansas Policy Institute on the topic of regulation is on WichitaLiberty.TV here.


Notes

  1. Rengers, Carrie. City offers Cargill tax abatement, parking garage financing. Wichita Eagle, June 6, 2016. Available at www.kansas.com/news/business/article82076122.html.
  2. Kansas Policy Institute. Business Perceptions of the Economic Impact of State and Local Government Regulations. Available at kansaspolicy.org/businesses-welcome-transparent-accessible-accountable-state-local-regulations/.

In Kansas, eliminating a state agency

A press release from the office of Kansas Governor Sam Brownback.

IMMEDIATE RELEASE
June 1, 2017

For more information:
Melika Willoughby
785.368.7138
[email protected]

Governor Sam Brownback signs Senate Bill 23
Streamlining state government by increasing protections and decreasing costs

Topeka — Kansas Governor Sam Brownback today signed Senate Bill 23, bringing the Kansas Securities Commissioner and related regulatory responsibilities under the Kansas Insurance Commissioner, and giving prosecuting authority for securities fraud to the Kansas Attorney General. This law, outlined in the Governor’s 2017 State of the State address, leverages existing institutions to increase consumer protection, decrease costs, and eliminate duplication.

“As Governor, I have worked to make state government more efficient, so we can better steward taxpayer dollars and improve core services for all Kansans,” said Governor Brownback. “When I appointed Commissioner Ney in 2013, I asked him to start looking for ways to reduce redundant efforts between the Insurance and Securities agencies. Through the work of Commissioner Ney, Attorney General Schmidt and Commissioner Selzer, this bill eliminates repeated efforts, while providing robust consumer protection.”

Current Securities Commissioner Josh Ney hailed the new law as good governance that better serves the people of Kansas.

“Governor Brownback’s proposal to combine the insurance and securities agencies is a commonsense, conservative solution to providing better consumer protection services for less money,” said Commissioner Ney. “This is a smart way to shrink the size and scope of state government while maintaining the independent watchdog role of the securities commissioner going forward.”

As part of the Kansas Insurance Department, the Securities Commissioner will now be appointed by the Kansas Insurance Commissioner, subject to confirmation by the Kansas Senate.

“This bill provides the State of Kansas with additional opportunities to better protect the public, to reduce costs, and to be more productive in so many areas,” said Kansas Insurance Commissioner Ken Selzer, CPA.  “We look forward to serving Kansans in this streamlined capacity.”

The Attorney General, Insurance Commissioner, and Securities Commissioner will coordinate to investigate and prevent crimes relating to insurance. SB 23 consolidates prosecutorial authority under the Attorney General.

“This reorganization will strengthen the ability of the Attorney General’s office to prosecute securities fraud, insurance fraud, elder abuse and financial crimes overall,” said Attorney General Derek Schmidt. “From a criminal enforcement standpoint, it is a smart initiative.”

Commissioner Ney will serve in his current capacity until the new law takes effect on July 1, 2017.

“Thank you to Commissioner Ney for his dedication to serving with excellence the people of Kansas,” said Governor Brownback.

Wichita city council campaign finance reform

On December 1, 2015 the Wichita City Council considered an ordinance regarding campaign finance for city elections. A Wichita Eagle article on the topic started with: “A proposed change in city ordinance would allow corporations, labor unions and political action committees to have a greater influence on Wichita politics. For years, city elections have remained insulated from the power of those groups, unlike national and state elections, because Wichita ordinance specifically forbids them from contributing to local campaigns.” 1

The city believed the proposed action was necessary to comply with recent court rulings. Under the proposed ordinance — which was passed by the council — corporations, labor unions, and political action committees would be able to make a single campaign contribution per election cycle of up to $500, the same limit as for individuals.

During the council meeting, citizens testified as to the terrible consequences should the council pass this ordinance. Here are a few excerpts taken from the minutes of the meeting:

  • “Citizens United has unleashed Frankenstein monsters purchasing our government with their pocket money.”

  • “Stated corruption and conflicts of interest have become institutionalized and what City legal counsel suggests will sell the Council and the City of Wichita to the highest bidder.”

  • “Stated according to a lengthy report last week, by the Pew Research Center, across party lines people are distrustful and concerned about big money in politics.”

  • “Stated big money does not donate, it invests and buys democracy. Stated she is asking the City Council to keep big money out of the City Council elections.”

  • “Allowing big money into City elections is a concern.”

  • “Stated the City has been independent and has a freedom from influence that the state and the nation do not enjoy. Stated you will then be under the thumb of people who want to control you. which is scary to those of them who are highly opposed to this situation and hopes that the Council will think of them and how this vote will benefit them.”

  • “Stated the League [of Women Voters] has studied campaign finance over the years at all three levels. Stated they are currently involved in the study of money and politics and their position currently reads that they want to improve the methods of financing political campaigns in order to ensure the public’s right to know and combat corruption and undue influence, which is their biggest concern.”

In its reporting after the meeting, the Eagle reported more concern: 2

But those who oppose the measure said they were concerned about opening up local elections to party-affiliated groups like PACs and about transparency since PACs do not have to report their individual donors.

“Individuals should decide elections, not corporations,” Frye said.

Several members of the public spoke against the changes.

“People in the shadows are going to be pulling your strings,” said Russ Pataki.

“It’s very worrisome what big money has done to state and national politics. The city has been independent (of that),” said Lynn Stephan to the council before the vote. “You have a freedom from influence the state and nation don’t enjoy.”

So, people are concerned about the corrupting influence of political campaign donations from corporations and political action committees. Citizens — and the Wichita Eagle — believe that currently the city council is free from this influence.

But the reality of city council campaign financing is different.

Stacked campaign contributions received by James Clendenin from parties associated with Key Construction. Click for larger version.
Stacked campaign contributions received by James Clendenin from parties associated with Key Construction. Click for larger version.
In my testimony at the December 1 meeting, I explained that there are a few corporations that stack campaign contributions in a way that circumvents prohibitions. Although I did not mention it at the meeting, sometimes campaign finance reporting laws allowed this to happen without disclosure until after relevant action had happened. To illustrate, here is a timeline of events involving just one company and its campaign contributions.

2008 and 2009
Executives of Key Construction and their spouses make six contributions to the Lavonta Williams campaign, totaling $3,000.

2010 and 2011
Executives of Key Construction and their spouses make eight contributions to the Carl Brewer campaign, totaling $4,000. Brewer was Wichita mayor running for re-election in 2011.

Executives of Key Construction and their spouses make eight contributions to the Jeff Longwell campaign, totaling $4,000.

2012
The City of Wichita is preparing to build a new airport terminal with a cost of around $100 million. Key Construction and Dondlinger and Sons Construction are two bidders. The contract is controversial. Dondlinger submitted a lower bid than Key, but it was alleged that Dondlinger’s bid did not meet certain requirements.

January 24, 2012
Executives of Key Construction and their spouses make six contributions to the James Clendenin campaign, totaling $3,000.

Stacked campaign contributions to Lavonta Williams from Key Construction associates. Click for larger version.
Stacked campaign contributions to Lavonta Williams from Key Construction associates. Click for larger version.
April 2, 2012
On this day and the next, executives of Key Construction and their spouses make eight contributions to the Jeff Longwell campaign for Sedgwick County Commission, totaling $4,000. At the time, Longwell was a Wichita city council member.

April 17, 2012
On this day and the next, executives of Key Construction and their spouses make eight contributions to the Lavonta Williams campaign, totaling $4,000.

July 16, 2012
An executive of a Michigan construction company and his wife contribute $1,000 to Longwell’s campaign for county commission. The company, Walbridge, is partnering with Wichita-based Key Construction to bid on the Wichita airport terminal contract.3

July 17, 2012
The Wichita city council votes in favor of Key Construction and Walbridge on a dispute over the airport terminal contract, adding over $2 million to its cost. Brewer, Longwell, Williams, and Clendenin participated in the meeting and voted. City documents state the job of the council this day was to determine whether the staff who made the decision in favor of Key Construction “abused their discretion or improperly applied the law.”4

July 20, 2012
An additional $2,250 in contributions from Walbridge executives to the Jeff Longwell campaign for Sedgwick County Commission campaign is reported.

January 2013
Williams and Clendenin file campaign finance reports for the calendar year 2012. This is the first opportunity to learn of the campaign contributions from Key Construction executives and their spouses during 2012. For Williams, the Key Construction-related contributions were the only contributions received for the year. Clendenin received contributions from Key Construction-related individuals and parties associated with one other company during the year.

Is there a pattern? Yes. Key Construction uses its executives and their spouses to stack individual contributions, thereby bypassing the prohibition on campaign contributions from corporations. This has been going on for some time. It is exactly the type of corrupting influence that citizens are worried about. It has been taking place right under their eyes, if they knew how or cared to look. And Key Construction is not the only company to engage in this practice.

Just to summarize: The Wichita city council was charged to decide whether city officials had “abused their discretion or improperly applied the law.” That sounds almost like a judicial responsibility. How much confidence should we have in the justice of a decision if a majority of the judges have taken multiple campaign contributions from executives (and their spouses) of one of the parties?

In some ways, it is understandable that citizens might not be aware of this campaign contribution stacking. The campaign finance reports that council members file don’t contain the name of contributors’ employers. It takes a bit of investigation to uncover the linkage between contributors and the corporations that employ them. For citizens, that might be considered beyond the call of duty. But we should expect better from organizations like the League of Women Voters.

Certainly there is no excuse for the Wichita Eagle to miss or avoid things like this. Even worse, it is disgraceful that the Eagle would deny the problem, as it did in its November 23 article quoted above.

In summary, some citizen activists — most council members, too — believe that a single $500 campaign contribution from a corporation has a corrupting influence. But stacking dozens of the same $500 contributions from executives and spouses of the same corporation? Not a problem.

Political campaign contributions are a form of speech and should not be regulated. What we need are so-called pay-to-play laws, which regulate the linkage between campaign contributions and council member participation in matters that benefit donors.5

Either that, or we need council members with sufficient character to recognize when they should refrain from voting on a matter.


Notes

  1. Ryan. Kelsey. Wichita City Council considers changes to campaign finance, salaries. Wichita Eagle, November 23, 2015. Available at www.kansas.com/news/politics-government/article45993895.html.
  2. Ryan, Kelsey. Wichita council votes to change local campaign finance law, raise council salaries. Wichita Eagle, December 1, 2015. Available at www.kansas.com/news/politics-government/article47329045.html.
  3. Weeks, Bob. Michigan company involved in disputed Wichita airport contract contributes to Jeff Longwell. Voice for Liberty. Available at wichitaliberty.org/wichita-government/michigan-company-involved-in-disputed-wichita-airport-contract-contributes-to-jeff-longwell/.
  4. Wichita City Council agenda packet for July 17, 2012.
  5. Weeks, Bob. *Kansas needs pay-to-play laws.” Voice for Liberty. Available at wichitaliberty.org/wichita-government/kansas-needs-pay-to-play-laws/.

In Wichita, bad governmental behavior excused

A Wichita newspaper op-ed is either ignorant of, or decides to forgive and excuse, bad behavior in Wichita government, particularly by then-mayoral candidate Jeff Longwell. From May 2015.

In a column just before the April 2015 Wichita election, Bill Wilson, managing editor of the Wichita Business Journal, reported on fallacies during the mayoral campaign, fallacies he called “glaring.” 1 But only a juvenile interpretation of the facts surrounding the events could find them fallacious. This is especially troubling since Wilson covered city hall as a reporter for the Wichita Eagle.

The first reported fallacy concerns the award of the contract for the new Wichita airport terminal. Jeff Longwell, then a city council member, had received campaign contributions from executives of Key Construction, the local company bidding on the contract. He also received contributions from Walbridge, the Michigan partner of Key. The Walbridge contributions are problematic, as they were made just a few days before the vote. More arrived a few days after Longwell’s vote. 2

In his column Wilson had an explanation as to why the council voted the way it did. That explanation was a matter of dispute that the council had to resolve. But the validity of the explanation is not the point. The point is something larger than any single issue, which is this: The Wichita city council was asked to make decisions regarding whether discretion was abused or laws were improperly applied. It is not proper for a council member to participate in decisions like this while the ink is still wet on campaign contribution checks from a party to the dispute. Jeff Longwell should not have voted on this matter.

For that matter, several other council members should not have voted. Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) received substantial campaign contributions from Key Construction executives several months before he voted on the airport contract. So too did Wichita City Council Member and Vice Mayor Lavonta Williams (district 1, northeast Wichita) . In fact, the only contributions Williams received in 2012 were from Key Construction interests. 3

Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction.
Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer has voted to send millions to Key, including overpriced no-bid contracts.
Then we have Former Wichita Mayor Carl Brewer. Here he’s pictured fishing with his friend Dave Wells of Key Construction. Do you think it is proper for the mayor to have voted in a quasi-judicial role on a matter worth millions to his fishing buddy? How do you feel about the mayor voting for no-bid construction contracts for his friend? Contracts that later were found to be overpriced? 4

In Wichita, city council members receive campaign contributions while participating in a quasi-judicial proceeding involving the contributors. This doesn’t seem to be improper to the Wichita Business Journal. But it isn’t alone. The Wichita Eagle doesn’t object to any of this. Well, maybe once in a while it does, but not very strenuously or for very long.

Another problem: Wilson dismisses the claim that Longwell was able to exert much influence over the other six council members in order to benefit a project in his council district. But during the campaign, Longwell eagerly took credit for the good things that the city council did. Though Longwell was but one of seven votes, his commercials made it seem like he performed these deeds all by himself. But when things go wrong, well, he’s just one of seven votes.

The last fallacy Wilson objects to is this: “The idea that a $500 campaign contribution buys a vote, a specious claim by Americans for Prosperity that inexplicably lives on. If a council member’s vote is for sale for $500, their stupidity trumps their corruption. And yet some of these false claims remain in political advertising, despite being debunked by two media outlets — and here.”

A few points: First, it’s not just a $500 contribution. We find many examples of individual $500 contributions from executives of the same company, along with spouses and other family members. The contributions are effectively stacked. Second, sometimes campaigns are funded to a large extent by these stacked contributions from just one or two firms. 5 Third, if these contributions are not seen as valuable to those who make them, why do the same small groups of business interests make the maximum contributions year after year?

As far as the claims being debunked: A few weeks ago I showed you the inexplicably bad reporting from the Wichita Eagle. 6 The Business Journal didn’t do any better.

Wilson’s op-ed seems more like an audition for a job at city hall than a critical look at the campaign and its issues. Making a move from news media to a government job in communications is a common career move. There are three former journalists working in Wichita city hall. One former Wichita Eagle reporter went to work for the Wichita school district. There are many examples in Topeka. It’s a problem when journalists who are supposed to be exercising watchdog duty over government agencies end up working for them. We can also recognize when journalists are auditioning for jobs in government.

Spirit Aerosystems tax relief

Wichita’s largest employer asks to avoid paying millions in taxes, which increases the cost of government for everyone else, including young companies struggling to break through. From May 2016.

This week the Wichita City Council will consider offering Spirit Aerosystems economic development incentives that will allow the company to avoid paying some $45 million in taxes. This will be accomplished through the authorization of $280 million of Industrial Revenue Bonds. 1

Industrial Revenue Bonds are a vehicle for generating and conveying tax exemptions. 2 In the IRB program, government is not lending money, and Wichita taxpayers are not at risk if the bonds are not repaid. In fact, in the present case the applicant company plans to purchase the bonds itself, according to city documents. Instead, the purpose of the IRB process is to allow Spirit to escape paying property taxes and sales taxes.

Cost of Spirit Aerosystems incentives.
Cost of Spirit Aerosystems incentives.
Usually the agenda packet the city prepares for council members and the public contains the amount of tax expected to be foregone. For this item that summary is missing, and the sales tax exemption is not mentioned. I have prepared a table summarizing data from the analysis prepared for the city by the Center for Economic Development and Business Research at Wichita State University.

Of note, the share of the cost of the incentives born by the City of Wichita is small, slightly less than one percent. The bulk of the cost is born by the State of Kansas, with the Derby School District and Sedgwick County facing smaller shares of the cost.

Also, the city is forcing a decision on a neighboring jurisdiction that it would not accept for itself, unless it uses one of many exceptions or loopholes. This adverse decision is forced upon the Derby School District. It faces a benefit-cost ratio of 1.16 to 1, which is below the city’s standard of 1.30 to 1, unless an exception is cited. 3 The Derby School District is not involved in this action and has no ability to affect the issuance of these bonds, should it desire to.

Besides this, the granting of these tax breaks calls into question the validity of taxation. If a company can be excused from tens of millions of dollars in taxes, can we say there is equal treatment under law?

Effect on young companies

When large companies receive tax abatements and exemptions, others must pay the cost of government. In particular, small and young business firms are usually not eligible for incentive programs like that being offered to Spirit, and therefore must bear a disproportional share of the cost of government. This is an important consideration, as Wichita is relying on entrepreneurship as a principle method of growing its economy.

The cost of these tax abatements burdens a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. This action — the award of incentives to an established company — is harmful to the Wichita economy for its strangling effect on entrepreneurship and young companies. As this company and others receive incentives and escape paying taxes, others have to pay.

There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by this action, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive.

Additionally, Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. But as we’ve seen in the unfortunate news emanating from several local companies, this is not the case. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Taxes for you, but not for me

Based on documents supplied by the city, Spirit will avoid paying $6,620,025 in sales tax through its participation in the IRB program. Kansans should be aware that our state has one of the highest sales taxes in the nation on groceries. The effect of this falls disproportionally on low-income households. 4

Spirit Aerosystems contribution to Yes Wichita

While Spirit seeks to avoid paying millions in sales tax, it campaigned for ordinary Wichitans to pay more sales tax. When Wichita placed a one cent city sales tax on the ballot in November 2014, Spirit Aerosystems contributed $10,000 to the group campaigning in favor of the sales tax. 5 Spirit’s immediate past president contributed $10,000 to the same effort.

Small business

This week American City Business Journals presented the results of a study of small business vitality in cities. 6 Wichita ranked at number 104 out of 106 cities studied. Awarding incentives to large companies places small business at a disadvantage. Not only must small business pay for the cost of government that incentivized companies avoid, small companies must also compete with subsidized companies for inputs such as capital and labor.

Finally, research has found that the pursuit of large companies doesn’t produce the desired growth: “The results show that large firms fail to produce significant net benefits for their host communities, calling into question the high-stakes bidding war over jobs and investment.” 7


Notes

  1. City of Wichita. Agenda for May 3, 2016. Available at wichita.gov/Government/Council/Agendas/05-03-2016%20City%20Council%20Agenda%20Packet.pdf.
  2. Weeks, Bob. Industrial revenue bonds in Kansas. Available at wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  3. Sedgwick County/City of Wichita Economic Development Policy. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/City%20of%20Wichita%20Economic%20Development%20Policy.pdf.
  4. Weeks, Bob. Wichita sales tax hike harms low income families most severely. Available at wichitaliberty.org/wichita-government/wichita-sales-tax-hike-harms-low-income-families-severely/.
  5. YES WICHITA INC. Receipts and Expenditures Report. December 30, 2014. On file at Sedgwick County Election Office.
  6. Wichita Business Journal. The State of Small Business: Wichita scores low in small biz vitality. Available at www.bizjournals.com/wichita/print-edition/2016/04/29/the-state-of-small-business-wichita-scores-low-in.html.
  7. William F. Fox and Matthew N. Murray, “Do Economic Effects Justify the Use of Fiscal Incentives?” Southern Economic Journal, Vol. 71, No. 1, 2004, p. 79.