Local Policies Make Tax Freezes Into Entitlements

If you haven’t read it, it’s still news.

And in that vein, consider a study on the impact of tax abatements on education by the Tennessee Advisory Commission on Intergovernmental Relations (TACIR) that failed to cause even a ripple in the news pond after it was filed in February of last year.

Continuing on our economic development theme of the week and in light of recent concerns expressed by the Shelby County Board of Commissioners and Memphis City Council about the generosity of tax freezes in a time of budget crisis, the report underscores our community’s over reliance on tax freezes and gives credence to people who complain that the tax freezes have essentially become entitlements.

TACIR’s revealing and often startling statistics frame up the conflict between local governments’ need for more taxes and the taxes given up in the recruitment of new business:

• Taxes were waived 809 times in Tennessee between 1993 and 2002. A remarkable 415 of them were granted in Shelby County by the Memphis and Shelby County Industrial Development Board, the Memphis/Shelby County Center City Commission, and the Industrial Development Boards of various smaller municipalities in Shelby County.

• In other words, 51 percent of all the tax waivers given in Tennessee were in Shelby County, one of 95 counties in the state.

• While Shelby County was granting tax freezes 415 times, Nashville/Davidson County waived taxes a grand total of 5 times.

• The number of Shelby County’s tax waivers is more than Nashville, Knoxville, Chattanooga and Jackson combined – 415 to 59.

It is astounding largesse at a time when Memphis and Shelby County Governments must raise taxes regularly to cope with budget stresses, while at the same time, city and county governments are giving up $63 million a year in taxes (as of July, 2002).

Two more astounding statistics:

• Of the $74 million in taxes waived by the 95 counties of Tennessee, Shelby County has waived $43 million, or 58 per cent of all the counties. Put another way, 94 counties in Tennessee have not waived as much in tax revenues as Shelby County.

• Of the hundreds and hundreds of cities in Tennessee, Memphis has waived 67 per cent of all the city taxes waived in the state -- $20.1 million compared to $30.9 million statewide.

• In Tennessee, as of July, 2002, the amount of city and county taxes waived across the state totaled $105 million a year. Memphis and Shelby County were responsible for $63 million, meaning that our city and county governments are waiving an incredible 60 percent of the statewide total.

• While Memphis/Shelby County is foregoing $63 million annually in city and county taxes, Nashville/Davidson is waiving $7 million. Nashville reserves tax freezes for headquarters and other major projects, while here, waivers are given for everything from headquarters to warehouses to hotels to apartment buildings.

One key recommendation by TACIR was for an annual summary of economic development agreements and cost-benefit analyses, because there are no legal requirements for the publishing of this data, and it is too seldom made available to the public, who must pay a disproportionate share of the tax burden because of the tax freeze policies.

Another report recommendation called for reporting requirements to apply to all public agencies which waive property taxes, including:
• central business improvement districts (like the Center City Commission);
• sports authorities (like the Memphis and Shelby County Sports Authority which was the financing arm for FedEx Forum);
• enterprise zone development corporations (like the Tourism Development Zone used to pay for FedEx Forum);
• health, education and housing facility boards (like the ones in Memphis and Shelby County Governments);
• tax increment financing projects (like Uptown);
• city and county property (like the Memphis and Shelby County Airport Authority).

Not all of these bodies must now inform the public of the amount of taxes that are waived as a result of their decisions. “It is not possible at the present time to determine the total cost or effectiveness of tax abatements because not all lessee of public property are required to file reports,” the report concluded. “When all lessees are reporting their activities, policymakers can determine the true scope of tax abatements.”

For example, because Memphis International Airport sits on public land, tenants on the land benefit from its tax-exempt status, but nowhere are the property tax implications of Airport Authority decisions reported to the public in a systematic way.

TACIR also called for completion of cost-benefit analyses before agreements are reached. “Since January 1, 2002, all economic development agreements must have a cost/benefit analysis attached,” the report said. “This sounds good and could be an effective analytical tool, but in reality, the analysis plays no role in economic development decisions.” Here, cost-benefit analyses are normally done only when questions about tax freezes are asked and only to justify the continuation of the current tax freezes policies. These analyses are not done by a firm with particular expertise or technical knowledge about tax abatements, but by one with strong ties to economic development agencies themselves.

In addition, TACIR said that the notification of all tax abatements should be made directly to the school systems whose revenues are reduced as a result of the decisions. “As a general rule, no one knows the actual magnitude of tax abatements, whether abatements are cost effective in creating jobs and promoting economic development, the total cost of tax abatements, how much revenue schools are losing because of abatements, and there is very little in the way of audits or legislative oversight,” the report said in a damning conclusion.

In the opinion of TACIR, tax abatements should be strategic and “custom-fit” and most of all, they should be tied to public policy objectives. Already, there is evidence that tax freezes are not the magic answer to economic development. International Paper is shifting hundreds of call center employees out of Memphis, Flextronics Logistics USA is cutting 100 jobs (virtually the same number of jobs it said it would produce when it lobbied for its tax breaks last year) and other companies are facing similar possibilities.

Because of the amount of the city and county taxes being waived and concerns about their strategic value, Memphians can be forgiven for not celebrating at the headline-grabbing sale of Echelon’s ballpark project for $39.5 million, which is $7.2 million more than its construction price. The new owner of the apartments proclaimed: “We really love downtown Memphis.” Unfortunately, this doesn’t include loving it enough to pay city and county taxes. The apartment complex will not pay any property taxes until 2025 in keeping with the 25-year tax waiver granted by the Center City Revenue Finance Corporation in 2000.

Tax freezes should be a key weapon in Memphis’ arsenal of incentives, but it’s become an entitlement for any company that can complete the forms. Perhaps, this is one time we could learn from Nashville, targeting tax freezes for impact projects with exceptional public value.

Mayor Wharton ran for mayor on a platform of restricting the use of the tax freezes in this way, and his office says that he is still working on a plan of action. Here’s hoping it comes soon, because every year, the current policy is costing county government more than $40 million.