Incentives, also known as taxpayer-funded subsidies, are the predominant methods used by government and elected officials to encourage economic development. Government says they are very successful, yet Kansas is mired in its fourth consecutive decade of economic stagnation and many counties are struggling mightily. This apparent contradiction raises a number of questions, particularly about how success should be measured on each type of incentive.
Future articles will tackle these and other questions. Today’s article explores the rationale of subsidizing activity to grow the economy.
The dictionary definition of incentives is “a thing that motivates or encourages one to do something.” The motivating factor in economic incentives is money. According to Art Hall, Director of the Brandmeyer Center for Applied Economics at the University of Kansas, incentives in state and local government are a bit different.
“An incentive is ultimately a tax break or a tax hike. So depending how you set it up your incentive or your subsidy, it’s either a tax break or a stream. There are just different ways of setting those things up,” says Hall.
In the past few months The Sentinel has covered the use of incentives in Wichita, Allen County, and Topeka’s plan to tackle the growth of incentives. Whether STAR Bonds, Community Improvement Districts, or business-specific tax breaks, incentives come in all shapes and sizes, but they ultimately are all paid for in some way by taxpayers.
Some of the most popular incentives in the state according to the Department of Commerce website are either tax credits or bonds. Hall says the type incentive used for a project can depend on the political party in power.
“Republicans deem tax breaks better. So it would not surprise me if you really look that there would be a lot more tax breaks than direct spending. So they rationalize it that way, but it is all the same thing,” says Hall.
Take for example the Kansas Angels Tax Credit. It is a tax break available to investors that put money into developing businesses in the state. The tax credit is an incentive meant to motivate investors to do something.
“If I get a property tax break but nobody else around me does then it’s an accounting fiction to call it a tax break rather than a subsidy,” says Hall.
Conversely, bonds programs, such as STAR bonds, are debt instruments created to fund a project paid for with future sales taxes. Just as with tax breaks according to Hall, it is money that will not be benefiting the wider community by going into the general fund.
“You are removing that sales tax stream from the general budgeting process…that money no longer goes into the state general fund for example.”
For example, in Wichita a baseball team received an incentive to relocate in the form of a $75 million stadium paid for through new sales tax in the special STAR bonds district around the stadium. That is tax revenue that will not benefit the general public, but the private company profiting from the stadium.
No one can say exactly how many incentives there are in Kansas. They are given out at the local, county, and state levels. According to a 2017 audit Kansas tax credits and incentives alone resulted in over $6 billion in lost tax revenue for the state. However, a large number of the tax credits are required by law to prevent issues of double taxation from the federal level.
Some clarity, however, is forthcoming thanks to legislation championed by Rep. Kristey Williams, (R) Augusta. Beginning with the 2020 session, the Division of Legislative Post Audit must conduct a comprehensive review, analysis, and evaluation of each economic development incentive program every three years.