Wichita doubles property tax exemptions for businesses
06/01/2014 2:13 PM
08/06/2014 9:35 AM
Editor's note: An earlier version of this story incorrectly stated the amount of Wichita city and school tax revenues lost to business tax exemptions in 2012. The incorrect numbers showed the maximum amount of tax revenue that could be lost because of the exemptions. The actual cost of the exemptions has not been determined.
Stung by the loss of thousands of jobs since the recession began in 2008, Wichita City Hall has doubled the amount of property tax exemptions granted to businesses, from roughly $11 million in 2009 to $25 million in 2012.
The list of exemptions is dominated by – but not exclusive to – the city’s planemakers.
City officials could not say last week how many jobs had been created by the tax abatements. Officials said research into city urban development records would be required to come up with a number.
The Eagle analyzed 10 years of City Hall tax abatements, obtained through the Kansas Open Records Act.
The analysis shows that after about five years of minor fluctuations in tax abatements to growing businesses, the city began handing out more exemptions as the recession deepened to “run like crazy to stay in place” economically, as aviation analyst Richard Aboulafia put it.
Such tax abatements are generally handed out along with bond issues that let businesses borrow money to grow or update facilities.
City Manager Robert Layton said the tax abatement policy has been heavily and successfully weighted toward job creation over retention.
“Almost all of them are for the creation of new jobs,” he said. “The one exception I can think of is Hawker, which the majority was retention. We weren’t offering a public incentive to most of these to keep their doors open.”
Property tax abatements are granted for five years initially. If the recipient creates a certain number of jobs, another five years are granted.
Most of the 2012 jump to $25 million was driven by a tornado that swept through Spirit AeroSystems in May of that year, causing millions in damage — millions that caused the city to partner with the planemaker on a $59.5 million industrial revenue bond issue to get the company back on its feet.
Spirit AeroSystems officials did not respond to a call seeking comment, but in October 2012, Spirit spokesman Ken Evans told The Eagle that the $59.5 million industrial revenue bond issue was “important to what we are doing and our investment in the community.”
Lost tax revenue
In the years preceding the twister, dating back to 2007, the city’s tax exemption tab was already rising: to $18 million in 2010 and $16 million in 2011.
The city’s willingness to abate taxes to help businesses grow has come as government budgets shrink. When the city abates taxes, other local government entities forgo revenue from the abated property taxes as well.
Jim Freeman, chief financial officer of the Wichita school district, said in an e-mail that the tax abatement debate centers on whether taxpayers should pay more taxes to improve the local business climate.
“A tax abatement for a company will cause others to pay more in property taxes to make up the lost tax revenue from the abatement,” Freeman said. “We levy for a certain dollar amount, so if a property has an abatement which lowers our overall assessed valuation, the tax mill levy must be higher to raise the same dollar amount.”
Lost aviation jobs
The tax abatements are the price of competing for jobs in a recession-battered economy, say council members, with surrounding cities and states ready to cut Wichita’s economic throat in a down period to land its jobs – particularly aviation jobs.
The city has lost about 12,000 aviation jobs to the recession, officials say. The Eagle reported earlier this fall that some 20,000 Wichita workers have essentially disappeared from the workforce.
“It’s simply a case of (job) recruitment and retention, I guess,” council member Janet Miller said.
Sedgwick County Commissioner Richard Ranzau laughs at the recruitment and retention explanation.
“Think about the property taxes we could cut with that money,” he said. “A mill and a half.”
It further demonstrates that city officials are using the abatements to select business winners and losers, Ranzau said.
“What about all the small businesses in town that don’t get a dime from those abatements?” he asked. “You don’t think they’d like to have a tax abatement?”
An uphill battle
Aboulafia, of the Teal Group, says the city’s contention that tax abatements are necessary to preserve aviation jobs “is plausible.”
“But you can’t prove it works,” he said. “Both sides have an argument, and it’s kind of tough either way.
“There are a lot of people out there aggressively pursuing aerospace jobs but buying jobs is foolish. The most you can do in this economy is defend against the other guys who are trying to buy your jobs.
“Is that worthwhile? It’s unprovable.”
Political scientist Jian Sun of Fort Hays State University traces the city’s increased use of tax abatements back to 2007, when the approved tax exemption reached almost $6.4 million, a “tremendous increase” from $565,000 in 2006, he said.
And then the city granted more abatements in response to the recession, Sun said.
“This does fit in the general thesis that cities give tax incentives in order to attract and retain businesses,” he said. “Wichita used this strategy to its great extent when the recession started.”
The Eagle asked the city last week for an accounting of the jobs created over the past decade by the tax abatements, a research project that urban development staffers have yet to complete.
“It will take us some time to pull together all the agenda reports on the five-year reviews going back to 2003. That same research will also reveal any abatements that were ‘retooled’ as a result of the five-year reviews,” city urban development director Allen Bell said. “I can tell you that none of the abatements were terminated.”
Vice Mayor Pete Meitzner acknowledged that the city is fighting an uphill battle with the tax abatements against the job losses.
“I look at it as sure, we’ve lost some jobs at Boeing but we’re gaining jobs in some other local aviation supply sectors and in manufacturing as a whole,” he said.
“Have we made up the difference? Probably not. But it’s a tough economy. We’ve kept the mill levy the same at a time when revenues are flat because our property valuations haven’t increased. We haven’t increased our number of employees, and we’ve reduced the city’s debt $53 million in two years.
“It’s been challenging, but we’re living within our means.”