OVERLAND PARK, KAN. • On a busy corner in this prosperous suburb of Kansas City, there’s a new office building under construction, with workers installing windows and a big crane alongside.
The five-story granite and glass building is set to be the new home of Teva Neuroscience, a growing drug maker that promises to bring 400 new jobs to Overland Park. For this, Teva is receiving a bevy of tax breaks and other incentives, including $31 million from the state of Kansas.
The building is set to be done in October, when Teva will move there and leave behind empty offices four miles away in south Kansas City, Mo.
Teva is hardly the first firm to receive incentives to jump the state line that splits Kansas City. A so-called economic development “border war” has simmered here for years, with dozens of companies receiving rich packages to move jobs to the other state.
But at the start of this year, Kansas unsheathed a powerful new weapon in the jobs arms race, lowering its personal income tax and eliminating taxes paid by many small business owners.
Kansas Gov. Sam Brownback has touted the plan as a bold experiment, designed to jump-start Kansas’ long-sluggish economy. And that has kicked off a hot debate about whether Missouri should follow suit, by answering with tax cuts of its own that will ripple a long way from Kansas City.
A bill moving through the Missouri Legislature this spring would cut individual and corporate income taxes here by three-fourths of a point over five years, to 5.25 percent and 5.5 percent respectively. Despite a corresponding hike in sales taxes, it would reduce Missouri tax revenue by an estimated $477 million to $670 million annually, raising worries among schools and social service programs. But its supporters say the tax cut is a must if Missouri hopes to keep up with Kansas.
“We are facing a serious threat over here,” said Ray Cozad, a Kansas City-based lobbyist for the pro-tax-cut group Save Missouri Jobs, which is partly funded by billionaire investor Rex Sinquefield. “We have to do something. The status quo will not suffice.”
But beyond the hearing rooms of Jefferson City, out along the line that divides the two states, the view is a lot more nuanced, and the true impact of Kansas’ tax cuts far from clear.
In this sprawling two-state region once known as the “Paris of the Plains,” even the border can be a blurry thing. There’s no big river like the one dividing Missouri and Illinois. There aren’t even many road signs to tell drivers when they’ve passed from one state to the other. Drive up State Line Road through south Kansas City and the most you’ll notice is that gas costs more on the west side of the street than on the east, thanks to Kansas’ higher fuel tax.
For companies, there’s often not much distinction either. Both states have big real estate markets; there’s as much office space in booming Johnson County as there is in downtown Kansas City. And they share a workforce; about 160,000 people commute across the state line daily.
“For a lot of people it’s as easy as taking a right at the on-ramp instead of a left,” said Pete Fullerton, president of the Economic Development Corp. of Kansas City.
So when both job-hungry states began dangling rich tax breaks to get companies to move, they found a lot of takers. An Associated Press analysis last year found that Missouri and Kansas combined have awarded more than $750 million in tax incentives and bonds over the last five years to nearly 200 businesses in the Kansas City area. That doesn’t include the aid often given by local governments, too. And while Missouri has scored some wins in this fight, the majority of movers, like Teva, have gone from east of the state line to west of it.
Pile on Kansas’ new lower tax rates, and some on the Missouri side of the border worry the Sunflower State’s cost advantage could be overwhelming.
“When you’re that close to the state border, it’s very easy to move your business,” said Ray McCarty, president of Associated Industries of Missouri.
But there’s little evidence that it’s happening much, at least yet.
People who work in economic development and real estate on both sides of State Line Road say they hear a lot of questions about the lower taxes. But so far it’s just questions.
Last fall, as talk grew in the region about Kansas’ tax cuts, Greg Kindle saw a noticeable uptick in calls at his Wyandotte County (Kan.) Economic Development Council.
“The mere conversation has spurred quite a bit of it,” he said. “Still it might only be a couple of companies that pulled the trigger.”
In part, he notes, that’s because Kansas’ low rates mainly help a certain type of company — S Corps and LLCs where the owners pay personal income tax on profits. Under Kansas’ new system, they’d pay no state taxes.
It’s also because a lot more than tax rates factors into relocation decisions. There are leases and the cost of moving heavy equipment. Buildings and road access. Most companies stay put.
“The companies that move get a lot of publicity, but it’s not as many as people would like to believe,” Kindle said.
A counterpart of Kindle’s across the state line agrees. Vickie Wolgast, president of the South Kansas City Chamber of Commerce, has a front row seat on the border war. Her office sits a mile and a half east of the Kansas line, and many of her member companies line Interstate 435, just a few exits from booming Overland Park. She knows a few of them are thinking about a move, but just a few.
“I just don’t think we’re going to see everybody picking up and moving to Kansas,” she said.
That’s not to say there’s been no impact.
Already this year, several companies have made the jump, with a few citing Kansas’ business climate as a reason why. Given time, predicts John Petersen, a real estate attorney at Polsinelli Shughart in Overland Park, more will follow. And he knows companies with business in both states that are starting to look more closely at expansion in Kansas, instead of Missouri.
“It has gone from novelty to serious discussion,” he said. “It is definitely changing their viewpoint from a business planning perspective.”
But that’s anecdotal. Hard numbers are hard to come by. The closest thing to objective data is a report issued in January by Kansas’ secretary of state, which found new business filings there grew 9 percent last year and shot up 21 percent in Wyandotte County. That report has been touted by tax-cut supporters in both states as proof of companies flocking to Kansas. But Kansas University economist Art Hall, who analyzed the numbers for the secretary of state, said it was far too soon for that kind of talk.
“There’s really no way to say at this point,” he said. “It’ll probably be five years or more before we have enough data to really analyze this.”
In Jefferson City, the issue is moving a lot faster than that.
The tax cut bill has already passed the Senate and could receive a vote by a House committee this week. At a hearing Tuesday, advocates for schools and social service groups warned the cuts could blow a hole in Missouri’s budget, and even some Republican lawmakers warned that the process is being rushed.
“I’ve never seen such a huge bill,” said Rep. Kevin Engler, R-Farmington. “I don’t mind having a tax increase. We just have to do it fiduciarily responsibly.”
But other lawmakers warned that inaction could carry a big cost to the state’s economy.
“Kansas is specifically targeting Missouri businesses,” said Sen. Will Kraus, R-Lee’s Summit, the bill’s Senate sponsor. “I believe if we do nothing, we’re going to lose Missouri businesses.”
There are some, even in the shadow of Kansas, who have other tools they think will do more than tax cuts to help grow Missouri.
As president of Kansas City’s Downtown Council, Bill Dietrich has seen hundreds of small companies open up in recent years — architecture firms and graphic design shops, IT companies and marketing agencies — often without incentives and despite the city’s 1 percent earnings tax. “They’re young. I go in these places and the oldest guy working there is 35,” he said. “They want an urban lifestyle.”
Many of these workers live downtown, too, he said. As in St. Louis, dozens of long-empty buildings in downtown Kansas City have been rehabbed into apartments and offices, with the help of state tax credits. Dietrich can point to three just from the window of a coffee shop on Main Street.
“How can the state help us?” Dietrich said. “Renew the historic tax credit.”
Others, like Wolgast and Fullerton, hope Missouri will tweak its Quality Jobs program to offer more aid for smaller companies, or for firms that “retain” jobs in Missouri to better compete with incentives for “new” jobs in Kansas. Some Kansas City-area business leaders have called for a truce, asking both states to lay down their economic development arms, though neither Kansas Gov. Brownback nor Missouri Gov. Jay Nixon seem inclined to do so at the moment.
And beneath all this debate is a sense among some on the front lines in Kansas City, that the focus on incentives is getting overblown.
No company’s going to turn down a tax break, says Lou Serrone, a veteran real estate broker with Block LLC in Kansas City. But he talks every day with firms that are mulling a move, and their minds are on other things — real estate costs, transportation, workforce — that have more impact on the bottom line.
“I’m not sure there are enough incentives in the world that they’re really going to drive these decisions,” he said. “That’s the reality of it.”
Hall, who studies regional economics and tax policy at the University of Kansas, says he largely agrees, and wonders if it’s worth upending a state budget to win a border war.
States are huge things, he notes, and while jumps like the one Teva Neuroscience is making to Overland Park get a lot of headlines, they really don’t mean that much in the context of a state’s economy.
“Look at the number of businesses that actually cross a state line. It’s minuscule. It’s not even a rounding error,” he said. “It just doesn’t happen that much, and I don’t know why all these political types think it does.”
Elizabeth Crisp of the Post-Dispatch contributed to this report.