Tuesday, June 14, 2005

The Beginning of the End of Tax Incentives

Perhaps we are witnessing the beginning of the end of the escalating bidding wars that cost cities and states millions of tax dollars for incentives to attract new companies. It is now only a rumble, but citizens' objections are growing louder as these incentives continue at a time when state and local governments are raising taxes to pay for basic services.

Already, a federal appeals court in Cincinnati has struck down Ohio's $281 million incentive package for Daimler Chrysler, and because it is a district court, its ruling applies also to Kentucky, Michigan and Tennessee. Similar lawsuits against incentives have been filed in Minnesota, Nebraska and Wisconsin, and one is threatened in North Carolina against tax breaks given to Dell.

Ironically, governors are appealing to the U.S. Congress to let them continue to give away the taxes. The governor of Ohio argues that incentives are needed to compete in a global economy, although it's pretty hard for Ohio to compete with Bangladesh on the basis of cheapness.

As Mary Lou Waits said on Smart City recently, cities that succeed in the global economy will excel in ideas. She stressed that cities that work on keeping pace with their rival cities are losers already, because only with "leap frog" strategies can cities compete and succeed.

A review of these kinds of strategies by U.S. cities never shows them to be based on selling their cities at a discount -- cheap land, cheap labor, cheap taxes. Rather, they are built on investing in better workers, high-quality universities, an enriching quality of life and efficient, economical public services.

This trend is especially important to Memphis and Shelby County, which waive enough taxes annually to pay for FedEx Forum in less than four years. The first signals of changing times have surfaced in meetings of Memphis City Council and Shelby County Board of Commissioners, who are beginning to question the process that gives non-elected boards such broad power to waive taxes.

Years ago, the legislative bodies delegated the authority to grant tax freezes to boards like the Memphis and Shelby County Industrial Development Board and Center City Revenue Finance Corporation. Tennessee law gives commissioner and council members the power to take it back whenever they like.

No one yet is arguing that incentives are not a tool for business recruitment. Rather, some local legislators are asking why they are responsible for piecing together a budget each year that becomes increasingly more difficult, but tens of millions of revenue is taken off the table before they even begin. There is a sense that tax freezes, payment in lieu of taxes (PILOTs), have become an entitlement, as shown in the fact that close to half of all tax freezes given in Tennessee are granted in Shelby County.

Some business recruiters argue that Shelby County can't compete without the incentives, because state government, unlike our surrounding states, has little to offer in the way of state incentives. Others point out that Nashville operates with the same incentives but gives less than one a year. And finally, some say that Shelby County's overreliance on tax freezes sends the message that its workforce is so poor that companies have to be paid to come here.

For eight years, local government officials have talked about targeting freezes for priority industries such as biotechnology and granting them only when jobs pay at least the county's median income. The lawsuit considered in North Carolina makes an argument along these lines - that freezes are unfair because they allow certain companies to receive special treatment and they are poor public policy.

Ultimately, it appears that the last word on the lawsuits will come from the U.S. Supreme Court, but regardless of the legal outcome, the conversations in local government about the tax freezes show no sign of slowing down.

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