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Sales tax drops would complicate Unified Government renewal efforts

By relying on sales taxes, officials with the Unified Government of Wyandotte County and Kansas City, Kansas, have been able to lower property taxes and push for reinvestments in the urban core. With sales taxes experiencing an unexpected recent dip, candidates running for commission seats face the prospect of making tougher decisions down the road.

It’s as sure as death and taxes. Every election and every budget cycle in Wyandotte County, commissioners expect to hear an earful from fed-up taxpayers.

This summer, they didn’t have to guess why one constituent was shifting angrily in her seat as they worked.

“It doesn’t make sense why we have to paythe highest taxes,” she said, while pointing out her belief that ill-funded county services and schools don’t measure up to her experiences at her previous homes in neighboring Johnson County and Parkville, Missouri.

“I shouldn’t be paying double what I would pay in Missouri or Johnson County,” she said of her property taxes.

Commissioners listened even though they don’t control school or other taxes. The commission has lowered property taxes by 14% and worked to improve services in recent years. They’ve done it thanks to strategic and unprecedented economic development spurred by the Kansas Speedway and Village West.

Yet the struggle to offer property tax relief, rebuild the inner city and keep up with day-to-day demands is a complex puzzle made even trickier by lagging sales tax collections in 2019. It’s left voters and elected officials on a tightrope as the Unified Government spends more than it’s bringing in while dipping into reserves.

Tax relief is happening, but commissioners know it’s a slow process that’s tough for any homeowner to swallow. As a result, the Unified Government has begun to rethink its budgeting strategy. It means community members – especially those in the inner city – and elected officials have to continually analyze the next step together to build and inspire collective purpose, even when trust has been frayed. Who could lose because of the activity? How will the city speak to that loss?

“We need to be able to be proud in our metropolitan community to stand up for it,” says the Rev. C.L. Bachus, who was the co-chairman of the commission for the consolidation of city and county government. If we’re “going to badmouth it, we ought to be doing something while we’re badmouthing it.”

As a result of this budget uncertainty, candidates standing for election to the commission on Nov. 5 tend to be in wait-and-see mode. Angela Robinson Markley, who is running for reelection in District 6, against challenger Diana J. Aguirre, responded to a Journal survey question by writing that the commission would need to be cautious in future budget cycles after being thoughtful and strategic in lowering property taxes in recent years. 

“We had been victorious in lowering taxes over several years, and had hoped to lower taxes further in coming years,” Markley wrote, “but we may need to hold the line if we are not bringing in sales tax revenue sufficient to fund our operations at current levels. We will begin using priority-based budgeting strategies this fall, which will help us make determinations in future budgets if costs need to be lowered.”

Markley is one of four commission incumbents on the ballot. In District 3, Commissioner Ann Murguia faces a challenge from Christian A. Ramirez. Commissioner Harold Johnson faces Jorge Luis Flores in District 4. In the District 1 at-large race, where the winner is chosen by voters countywide, incumbent Melissa Brune Bynum will again face former state legislator Mark Gilstrap, her general election opponent four years ago.

One question for voters this fall is whether they’re happy enough with the Unified Government’s direction to retain incumbents or whether they’re in a mood for change, as they were two years ago, when Mayor David Alvey unseated one-term incumbent Mark Holland for the mayor’s post.

 

David Alvey, third from left, is mayor of the Unified Government of Wyandotte County and Kansas City, Kansas. He was among those who attended the groundbreaking this summer for the Merc Co+op, at Fifth Street and Minnesota Avenue in downtown Kansas City, Kansas.

Wins But Not Satisfaction

Even as Alvey broke ground on a new grocery store in downtown KCK this summer, a community addition that required years of effort, constituents reminded him that it wasn’t a cure-all.

Few could criticize Alvey for celebrating what even hardened naysayers would call a win. It will look like projects in more affluent western Wyandotte County even if its funding is slightly different. The Merc Co+op grocery store is a public-private venture. The $7 million building will receive money from several public funding streams including $3.2 million from the Unified Government’s hotel revenue fund and $1.6 million from sales and property taxes from the downtown grocery tax increment financing.

Across the street, construction equipment buzzed as the University of Kansas Health System transformed the building that once housed the Environmental Protection Agency’s regional office into a 47-bed inpatient mental and behavioral health unit dubbed the Strawberry Hill Campus. 

Developers have proposed housing nearby, and the shuttered YMCA fitness center and dormitory building is slated to be renovated into apartments.

But even a Merc board member paused during the festivities to point out the complexities of breathing new life into the inner city.

“There is a lot more work that needs to be done to ameliorate the issues of food access and economic prosperity for the eastern portion of Wyandotte County,” says Rachel Jefferson, executive director of the Historic Northeast-Midtown Association. “We see the addition of the store as part of the solution – not a blanket panacea for all the difficulties we face here in KCK.”

Her words came as the Unified Government experienced an unexpected 5% drop in sales tax revenue. Sales taxes have played an outsized role in helping put the government’s house in order because they allow the community to spread the tax burden to shoppers and businesses making transactions in the county.

The shortfall meant property tax reductions were off the table next year. It sharpens the political difficulty in trying to balance the needs of the government’s most vulnerable populations in areas such as midtown, the northeast side and downtown while decreasing property taxes.

A Mysterious Lag

For years the Unified Government, which has a consolidated city-county-parks general fund of $233.1 million, relied heavily on property taxes, but it has worked to reduce that levy as economic development in western Wyandotte County has paid off, thanks in part to STAR Bonds, a state incentives program for tourist attractions. As those bonds are paid off, residents are starting to see the promised rewards, with lower property taxes. This year the bulk of revenue was more evenly split with 28% coming from property taxes, 22% from sales taxes and 21% from franchise taxes.

But the Unified Government has suffered, as have other counties and cities across the state, as sales tax collections puzzlingly dropped. State officials say that by midsummer, sales tax collections were rebounding but still not meeting expectations.

While concerning, Alvey says, the lag doesn’t necessarily reflect overall retail spending. Shoppers are frequenting Wyandotte County businesses, he says. The state does not publicly break down which businesses are not performing well for proprietary reasons. But Alvey says the general trend is a lag in business-to-business spending.

“Retail sales account for about 50% of our total sales tax revenue, and that’s been steady. So it wasn’t in the retail sales, it was more in the sales tax on utility, construction, wholesale, information services, and that was a big chunk,” he says. “And so that’s business-to-business transactions.”

For years, Alvey says, Wyandotte County has experienced construction growth in the form of several large-scale industrial projects, including the 850,000-square-foot Amazon fulfillment center.

He theorizes that without any recent industrial-scale construction projects, the dip in tax collections was inevitable.

It’s part of the reason why – as commissioners began their budget work this year – Unified Government staff members presented mainly new initiatives that would increase revenue.

“Every dollar we invest here helps us save even more than that,” Doug Bach, the Unified Government’s administrator told commissioners this summer. “This budget works hard to target the spending that drives future revenue growth.”

Despite the sales tax dip, the Unified Government did not initiate cuts that will drastically alter life for Wyandotte Countians. Commissioners cut funds for contracted services commodities such as gas, water and fuel in each department, and borrowed from its reserves to balance the 2020 budget.

But it wasn’t headache free. Commissioners and the mayor couldn’t reduce the mill levy. It’s a political promise that virtually everyone who has ever successfully run for office in Wyandotte County has made or worked diligently to do.

“It didn’t seem prudent at this time to experience a decline in sales tax revenues and then set us up to experience a decline in property tax revenues,” Alvey says.

Wyandotte County is hardly alone.

“It’s pretty uniform throughout the state,” says Steve Stotts, director of taxation at the Kansas Department of Revenue.

Sales taxes have lagged sporadically throughout the nation, too, he says.

Internet sales, which are actually collected through the use tax, play a role in the problem, he says. Sales were largely flat from brick-and-mortar retail stores, car dealers and grocery stores.

When economists gathered in Topeka for a traditional meeting with state revenue officials, they couldn’t immediately pinpoint a cause.

“When we met in April, we were looking at about seven or eight months of negative sales tax growth. That obviously is a big concern with a tax source that is your second-largest,” Stotts says.

The dip doesn’t have the traditional hallmarks of a recession.

“When you’ve got unemployment at below 4% and you’ve got wage growth of 2 or 3%, it’s kind of strange to have sales be flat. That’s really what’s kind of confusing with the whole situation,” he says. “When you see retail sales flatten out like that, you always worry that people are not spending as much and starting to pay off debt,” Stotts says. “That always precedes an economic downturn. But then when you look at employment continuing to be strong and wage growth picking up, it doesn’t make sense.”

In Wyandotte County, Alvey has heard many theories, everything from the unusually harsh winter weather to speculation that the trade tensions between the United States and China have cooled spending and industrial growth.

But Alvey, Stotts and others dismiss the idea that the weather could be the overall long-term factor, given that consumers generally still make purchases when the weather improves.

“Sometimes it can impact one or two months,” Stotts says.

Stotts points out that the outlook is improving slightly.

One factor helping metropolitan Kansas City is population growth that helps boost taxes and bail out local governments.

However, the lag points to a larger problem overall, academic scholars say. Researchers at the Brookings Institution released a report in 2018 calling retail sales taxes “inefficient, inequitable and hard to administer.”

Sales tax rates have slowly increased since the tax was introduced during the Great Depression. The tax made up 34% of all state tax revenues in 2016 for the 45 states that levied sales taxes, according to the report The Retail Sales Tax in a New Economy.

“In the face of a declining tax base, states have increased tax rates in order to maintain tax revenues,” the report finds. 

Sales tax started as a way to tax consumption by taxing household purchases of finished products. But it’s changed. The report finds that 40% of retail tax revenues come from intermediate goods purchased by businesses. That tax is then factored into consumer costs. “While hidden taxes may be popular with legislatures,” the report says, “they conflict with the idea that the population ought to have a clear idea of what they are paying for government.”

  • Promotional items for The Merc Co+op in downtown Kansas City, Kansas.
    The Merc will run the new 14,000-square-foot grocery in downtown KCK.

A New Approach to Budgeting

Despite such criticism, don’t expect states to eliminate sales taxes anytime soon.

In Wyandotte County, Bach has asked commissioners to rethink everything they know about budgeting by implementing priority based budgeting, allowing them to formulate needs  and deploy resources targeted to that mission, Alvey says.

“Right now, governments … have this list of programs or services,” says Kathleen VonAchen, the Unified Government’s chief financial officer. “And they just continue doing those services year over year over year without looking at: ‘Gee, you know, should we continue to do this service that we started doing 50 years ago?’ Governments just don’t do that.”

Instead governments often look at the incremental increase of money above what they collected last year. It leaves little capital to create new initiatives that residents might want. Instead of looking at what to do with a tiny amount of money that could fluctuate with sales tax volatility, property tax law changes and many other unpredictable circumstances, VonAchen says that this year the county will rank all of its services to determine what services best meet the needs of residents.

The commission began meeting this fall to talk about the methodology, impacts and savings. The system, Alvey says, allows the Unified Government to take a more proactive approach with revenue shortfalls and also helps determine what makes financial sense in this era.

It will almost certainly raise the heat as they weigh what matters.

Regardless of what happens, Alvey says he will not back down from plans to invest in the urban core.

“I don’t know if we can buck the trend on sales tax, but what we have to do is continue to look for ways to bring more economic development to the city, obviously. And I’m of course very committed to trying to rebuild some of our inner city neighborhoods, which have been hollowed out over the decades. But that’s a long-term play. We’re devising our strategy to do that. And of course that takes funds as well,” Alvey says.

Alvey points out that Wyandotte County has weathered difficulty before. For 60 years or more, sales tax collections were as much a source of discouragement as they were a source of revenue as retailers and businesses avoided Wyandotte County. Before STAR Bonds helped finance Kansas Speedway and The Legends shopping center, Wyandotte County was perceived as a place to avoid. It has since become one of the state’s top tourist attractions with the addition of Cabela’s, Great Wolf Lodge and Children’s Mercy Park, where Sporting Kansas City plays.

For years the STAR Bond projects only paid property taxes while the sales taxes generated there helped finance the cost of construction. Wyandotte County – unlike many other STAR bond projects since – saw an unprecedented return from that wait.

“We realized $12 million a year in sales tax revenues,” Alvey says. “When it paid off, we saw an immediate jump in sales tax revenue.” 

Activity was so strong in Village West that the STAR Bonds paid off in 2016, which was five years earlier than projected. It generated $12 million in local sales taxes, which had been deferred and $42 million in state sales tax, says Mike Taylor, spokesman for the Unified Government.

It was immediately used to reduce property taxes in KCK by 14%. It’s also allowed the city to spend nearly $2 million a year in blight reduction, Alvey says. Much of that has happened east of Interstate 635 in the older areas of the city.

The city is cutting the grass faster at many unkempt properties. It’s boarding up homes that need it. And it’s actively working to get abandoned homes into the hands of rehab professionals. If they can’t be fixed, those houses are torn down. But that isn’t cheap. Alvey estimates the city spends up to $20,000 to tear down a home in some cases.

Unrealized Potential?

All of this is a start. It’s hardly the solution.

“That’s just establishing the floor for redevelopment. Now we have to find ways to bring new investment. You’ve got to stop decay, and now once you’ve put a floor on decay by doing the blight remediation, then you come in with targeted investments that are strategic that will ultimately produce a return on investment. That is, they generate more tax revenues, create more jobs, bring more people in. That’s the long-term solution,” Alvey says.

When Alvey shares that philosophy around the city, there are few people who don’t appreciate it.

“But they’re also impatient,” he says.

Many have been suffering for years.

It’s also why it gives Alvey pause to see a dip in sales tax monies. Will this be the last year? Is it a blip? Or is it the start of a trend that counties will have to solve?

Beyond tearing down and rehabbing property, Alvey is also leading a charge to build off of the steady housing growth in Kansas City, Missouri. Across the state line, Kansas Citians are leaving the Crossroads area and other trendy locations as prices soar. It gives Kansas City, Kansas – a spot with charming neighborhoods and plenty of land to develop near downtown – a rare advantage.

It’s encouraging for the Rev. Bachus, who got a visit from the mayor recently.

“I do think he’s fairly sincere, and if you can get him to hold to the course that he’s talking about, we might finally begin to get some daylight,” says Bachus, who has led his KCK flock for 48 years.

Bachus has heard other well-intentioned mayors hit the same notes. He worries Alvey will be more of the same. Some made incremental changes but failed to produce enough change to sustain the northeast. He understands the slow pace of development. He wholeheartedly agreed with the economics of building Village West. Now that the bonds have been paid off, however, he says it’s time for the northeast to get the kind of infrastructure and attention that those in western Wyandotte County enjoy.

“I think people ought to have subdivisions where they can build expensive homes if they can afford it. I’m not against that,” he says. “I’m just against the fact of it is that you want to do that at the expense of giving other decent people an opportunity to live in some decent places.”

Bachus, whose church built homes in northeast KCK when no one else would, understands that securing financing isn’t easy in the inner city even for financially sound customers. But he says it’s time for political leaders to step up and leverage their strengths with lending institutions to help something besides a fast food chain.

“Find somebody who has got the potential of doing it, and make sure they squeeze the local financial institutions to make them do some loans,” he says.

Bachus recently moved church money after a bank refused his well-established church a basic request.

“I’ll be darned if they wasn’t treating me like I was walking in off the street with a milk can,” he says.

Opening the Merc will help, but Bachus wants to see the government talk to its own residents, too.

One of his church members runs a pocket grocery store to serve the immediate needs of one neighborhood. The owners cook sandwiches, too.

 

  • Former bank building near the Indian Spring Mall.
    The Indian Springs Mall area once signaled a community in decline.

 

“They’re making a mint over there,” he says. He wonders why the city wouldn’t help that small business create a second operation to fill a niche in another food desert.

It’s long past time, he says, to capitalize on the vacant land and build houses for workers in downtown Kansas City, Missouri. It’s time for the city to start touting its amazing accessibility, unique neighborhood personalities and affordable housing.

A resident of downtown KCK can drive to downtown Kansas City in less than 10 minutes. It’s actually a faster commute than from almost any residential neighborhood on the Missouri side, he says. Rents and mortgages are generally cheaper, and the crime rates continue to fall in Wyandotte County.

Bachus knows the story others have historically told about downtown KCK  and northeast KCK. It’s flat wrong, he says.

“The whole metropolitan area tries to make us a stepchild to everything else. Now people don’t even fight back over that. We just take it on the chin,” Bachus says.

The pastor points out that the inner city has a downtown design and infrastructure – even if it isn’t bustling as it once was – that a suburban community would give anything to replicate.

“I like Kansas City, and I don’t know nowhere else I’d rather live, and I’ve been all over this country. And out of the country, too,” says Bachus, whose trademark drawl gives away his Southern roots. “And I don’t know nowhere I would want to live in Johnson County. They could try to get me to live in Jackson County, and I would leave here kicking and screaming.”

 

Journal Fall edition cover

A version of this article appears in the Fall 2019 issue of The Journal, a publication of the Kansas Leadership Center. To learn more about KLC, visit http://kansasleadershipcenter.org. Order your copy of the magazine at the KLC Store. For a subscription to the printed edition of The Journal, visit  https://kansasleadershipcenter.org/store/one-year-subscription-to-the-journal-4-upcoming-issues/.

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