How Bad was the CDFA Study of Incentives in Kansas City?
It was with great anticipation that I received the long-overdue study of economic incentives in Kansas City conducted by the Council of Economic Finance Agencies (CDFA). Even before the actual publication, I had been critical of the amount spent, the trade association (!) hired to do the analysis, and the repeated extensions given to them—making the report over a year late.
Sadly, my worst fears were realized when I received a draft copy of the report via an open records request. And the release of the final report hasn’t made things any better. In short, the report tallies up the amount of subsidies awarded in Kansas City, tallies the investments made, and divides the latter by the former. Their conclusion was that “each incentive dollar invested generated $3.83 in additional tax revenue.”
During the years this study took to complete, was any effort made to answer the central question before policymakers—how much development happened because of incentives? If so, I can’t see any evidence of that effort. The question has been tackled by other researchers—most if not all of whom seem to arrive at the same answer: very little—or certainly not enough. The Upjohn Institute for Employment Research concluded in a July 2018 study that “for at least 75 percent of incented firms, the firm would have made a similar decision location/expansion/retention decision without the incentive.” That is a devastating conclusion, suggesting that three out of four dollars spent on incentives is unnecessary.
As a result, policymakers were vexed when the CDFA’s report was presented to the City Council on August 16. The report gives them no information that could help them distinguish good incentive investments from bad. Councilmembers’ repeated questions about how this report can inform future decisions were met with answers that seemed designed to obfuscate.
Consider the following exchange between one councilmember and the director of the office of economic development (starts at 48:15):
Councilman Lucas: So there is some public conversation at times to the idea that we should not incentivize on the Country Club Plaza, we should not incentivize downtown. I guess the answer that I am hearing is that we can’t quite answer that question. Is it your view, Ms. Tyndall, that this study can actually help answer the question as to whether we have provided sufficient incentivizing activity such that we do not need to continue to extend incentives in certain areas?
Kerrie Tyndall: The way that I would respond to that question is to say that I think that this study shows that in general economic development incentive tools do work. They do provide an overall positive return on investment to the city when we apply them, but they are ultimately—at the end of the day—a tool. And someone has to take advantage of those tools in order for us to see an impact and from a public sector perspective we can certainly invest our dollars and be in control of how we invest our dollars when we’re trying to leverage investment of the public sector we’re somewhat dependent upon them to take advantage of those tools in order to accelerate some of the social gains that we want to achieve . . . [I gave up transcribing here].
In other words, no. City officials seem to be saying that taxpayers ought to subsidize every project in order to realize that three-to-one investment return. After about 90 minutes, the mayor seemed frustrated that council members weren’t buying the report’s conclusions. He asked one of the consultants—PGAV Planner’s Adam Stroud—about whether the incentives created the return that the report touts (starts at 1:25:55),
Mayor James: If $288 million [in incremental real property taxes*] is as a result of some incentive being used, if there is no incentive being used, would the number be zero?
Adam Stroud: I can’t answer that.
James: Would it be less than the $288 [million]?
Stroud: I also can’t answer that.
Again, unlike so many other studies of economic development incentives, this one simply omitted any analysis of whether incentives were necessary to drive development. This report just makes that assumption, but as Stroud honestly points out, he doesn’t know because this study didn’t consider it.
Despite the costliness and tardiness of the study, this giant hole in its design makes the report essentially worthless, both for assessing of existing incentive subsidies and for guiding future policymaking.
*The $288 million that the mayor refers to is actually the amount that will be returned to the developer instead of going to fund city services, so it’s unclear why the mayor asks the question this way. Nevertheless, it’s clear from the context that the mayor is looking for a link between subsidies and higher tax revenues, but this study can’t establish such a link.