New reporting reveals failures of Commerce Department cronyism

New reporting confirms failures of Commerce Department cronyism programs

Jan 9, 2024 by Kevin Schmidt

While Kansans were busy buying and unwrapping gifts over the holidays, auditors revealed distressing problems with two major corporate welfare programs run by the Department of Commerce that could leave taxpayers holding the bag.

Bad news about these types of programs isn’t surprising based on a long-track record of failure aside from giving politicians opportunities for press releases and ribbon cuttings.

The fact is that corporate welfare programs like the ones in Kansas (and elsewhere) don’t create prosperity and innovation, instead they reallocate resources that reduce overall prosperity.

How much did the special tax breaks under APEX cost?

For example, lawmakers crafted the Attracting Powerful Economic Expansion (“APEX”) program to create a special tax break for Panasonic to build its new $4 billion electric vehicle battery plant in Kansas.

The problem? An auditor for the Kansas Legislative Division of Post Audit looked at the APEX program and found, “no one at the Kansas Department of Commerce or the Kansas Department of Revenue knows how much that tax break has cost.”

Failure to track the amount of the tax break leaves taxpayers in the dark on the program’s costs and makes it virtually impossible to claw back the incentives if Panasonic, or the other beneficiary of the program, Integra, fail to follow through on the requirements to obtain the tax breaks.

Tax breaks are either (tax) expenditures or a component of receipts, so not tracking them appears to be noncompliant with Section 5 of Article 15 of the Kansas Constitution:

5. Financial statements; publication. An accurate and detailed statement of the receipts and expenditures of the public moneys, and the several amounts paid, to whom, and on what account, shall be published, as prescribed by law. History: Adopted by convention, July 29, 1859; ratified by electors, Oct. 4, 1859; L. 1861, p. 66; Jan. 29, 1861.

The lack of transparency about corporate welfare programs is a persistent problem. That’s why the Kansas chapter of Americans for Prosperity Foundation sent a Kansas Open Records Act request to the Department of Commerce for all the quarterly and annual reports on the APEX Act.

How successful are STAR Bonds, really?

AFP Foundation continues to investigate the Commerce-run Sales Tax and Revenue (“STAR”) Bond program.

STAR Bonds are another corporate welfare program that allows private development projects to be financed by government bonds backed by taxpayers. Sales taxes generated by the development are supposed to be used to repay the bonds, but as you might guess by now, these sorts of programs often fail to achieve their stated goals.

A recent report found one development defaulted on repayment and could take until 2104 to pay them off:

The Prairiefire development has defaulted on close to $65 million in outstanding bond debt, further substantiating concerns among Kansas lawmakers that the Overland Park project hasn’t generated enough sales to make payments in a timely manner.

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Though Prairiefire has not previously missed a payment on its STAR bonds, auditors with the Kansas Legislature last year raised the potential for a default. In a report on the polarizing state incentive program, the auditors estimated Prairiefire would take at least until 2046, and potentially until 2104, to retire the bonds, based on sales tax revenues projected from out-of-state visitors. Its remaining two tranches are set to mature in 2029 and 2032.

A 2021 audit by the Kansas Legislative Division of Post Audit raised serious concerns about STAR Bonds and potential harm to taxpayers.

The audit found that only three of the sixteen STAR Bond projects it reviewed met the program’s tourism metrics. Previous studies have also questioned the claims of job creation from the STAR Bonds program.

Instead of government continuing to gamble taxpayer dollars into the market, lawmakers should allow the STAR Bond to sunset in July 2026 and bar any new business from participating in APEX.

There are better, and cheaper, ways to promote business creation and innovation in Kansas, like right-sizing regulations, pro-growth tax reform, budget stability and other reforms, ending government putting thumbs on scales, and regulatory sandboxes that lower regulatory and licensing burdens to test new products or start new businesses.