Tuesday, November 01, 2005

Current Policies For Tax Freezes Defy Logic

Let’s be frank: tax freezes are about land development, not economic development.

That’s why you may have noticed that the leading defenders of the current Memphis and Shelby County Industrial Development Board’s Payment in Lieu of Tax (PILOT) policies are not leading CEO’s from the business community, but land developers.

For 15 years, it’s been development interests that have successfully lobbied for policies that turned tax freezes into entitlements and took them to the point that warehouses may never again pay taxes in this city. It is staggering to drive Shelby Drive and Holmes Road in Southeast Shelby County and realize that few of the hundreds of warehouses covering the landscape are paying property taxes.

While Memphis City Council and Shelby County Board of Commissioners are now concerned about the $60 million in city and county taxes that are being waived each year, it was only a few years ago that they voted overwhelmingly to allow warehouses to get a tax freeze every time a tenant changes. No wonder the list of 415 tax freezes granted in a 10-year period -- about seven times more than Nashville, Knoxville, Chattanooga and Jackson combined – is clogged with warehouses.

Like the PILOT policy itself, it made little sense from an ROI point of view since many of these warehouses routinely given tax freezes created jobs paying less than $20,000 a year. Then, there’s also the way that tax freezes have acted as an incentive for sprawl, as demonstrated by the abandoned warehouses and rail lines in the urban core that can be seen from I-55 between Third and Mallory.

In a last-ditch attempt to stem the tide of a more reasonable, targeted approach to tax freezes, some economic development officials are now justifying PILOT’s by saying that the city and county’s property tax rate is too high. Of course, this begs the question of why the other 99 percent of our business community doesn’t deserve such consideration, especially small businesses that produce more than 80 percent of all new jobs.

Then, those arguing that taxes are too high simply ignore the fact that one of the causes are the tax freezes themselves. In rough terms, the $60 million in annual tax freezes equals about 50 cents of the combined city-county property tax rate paid by Memphians.

Frequently coupled with this argument is the warning that Shelby County will lose “logistics businesses” to Fayette County or DeSoto County if we don’t give our taxes away. The key question regarding warehouses is this: why should taxpayers care where they locate? If they locate in Shelby County, it just perpetuates the disproportionate share of local property taxes being paid by homeowners.

More fundamentally, if we are going to talk the talk of regionalism, we need to be prepared to walk the walk of regionalism. Our economic development rhetoric says that all of us in the Memphis MSA are in this together, but our policies say that it’s us against them.

Perhaps it’s time to bring more coherency and consistency to all of this, and it can be argued that a moratorium gives every one time to take a breath and think through these issues calmly and reasonably. Maybe we could even transform regionalism from largely empty rhetoric into a workable tri-state collaboration.

Just as Shelby County will not collapse because of the moratorium recently passed on development, neither will our economy collapse with a moratorium on tax freezes. In fact, members of the Memphis City Council and Shelby County Board of Commissioners say that if a moratorium is approved and incentives were required to land a hot prospect, the request for a freeze could be taken directly to the local legislative bodies for their approval.

It’s not enough any longer for the chairman of the IDB to suggest that adequate checks and balances are in place and point to the fact that city and county mayors sign off on all tax freezes. In truth, the process is set up in a way that often paints the mayors into a corner and pits them as deal killers, a position that no politician relishes.

But more persuasively, it’s not the mayors’ jobs to prepare the budget, set its revenues and establish the tax rate. That rests with City Council members and county commissioners, and that’s precisely why they are now demanding to have a voice in decisions that are taking millions of dollars off the table before they even begin their budget process.

If a moratorium is passed or not, one thing that is needed is an objective analysis of tax freezes. Advocates of the status quo constantly quote the 2000 Younger Association study that said that for every $1 in waived taxes, there is a $2.47 benefit. Of course, the report doesn’t take into account what projects would still have come to Memphis and Shelby County without any freezes.

As a company official once commented after pressing for the maximum tax freeze and getting it: “As long as you’re giving away money, we’re sure going to take it.” At the same time, he admitted that the company had already decided to move to Memphis for a number of strategic reasons that had nothing to do with local tax policies.

There’s a rule in government that is never broken, and it wasn’t broken with the 2000 PILOT economic impact study. On controversial issues, government pays for studies whose conclusions are guaranteed in advance.

That’s why the IDB quit hiring the University of Memphis Bureau of Business and Economic Research to conduct evaluations of its PILOT’s. The Bureau staff couldn’t be counted on to deliver the desired conclusions – a justification for keeping the tax freezes exactly as they are. It’s time to clear the air with a definitive study by an impartial economist who is not being paid by any agency that markets or grants PILOT’s.

Meanwhile, the debate about tax freezes continues, fed by the IDB’s pervasive tone of disinterest about its impact on government budgets. Rather than welcome a serious conversation on this important public policy, IDB members trot out the same old arguments for keeping things as they are.

Faced with questions about decisions to waive taxes in return for low-paying jobs, they say that the Memphis workforce is ill-prepared to compete in today’s economy. The first time it made this particular defense of tax freezes was about 1988, and in the 17 intervening years, the IDB has never hired a consultant or convened a meeting to analyze and develop strategies to address workforce issues.

Apparently, the IDB needs a 12-step program, but the first one is to move past its current denial. That first step is simple and overdue. The IDB has to acknowledge that the era of tax freezes as entitlements is over. Higher standards, similar to those that work so effectively in Nashville, should be set to guarantee that the public policy benefits of tax freezes are compelling and profound.

In a recent article in The Commercial Appeal, Tom Jurkovich, the director of Nashville Mayor Bill Purcell’s office of economic and community development, put it logically: “Incentives should incentivize. Once it becomes an entitlement, it’s no longer an incentive.”

That’s a sentiment worthy of becoming the IDB’s new slogan.


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Note:
We have been asked about the difference in the amount that we use for the annual impact of tax freezes - $60 million – and the amount given to The Commercial Appeal by County Trustee Bob Patterson - $47 million. The number we use is from the state comptroller, and Mr. Patterson tells us that traditionally the county amount lags behind because of the nature of the county process to quantify the amount of the freezes.

2 comments:

turnerarch said...

Question:
While I agree that our IDB is out of control, I was under the impression that the tax status given to companies required them to pay the assessed value on a piece of property before it was "developed" for a new use. Property tax freezes were just that- a freeze on the value assessed for a piece of property at its current level for a set period of time. Am I wrong on this point?

Smart City Consulting said...

You are correct in your understanding. The problem is that the taxes for an undeveloped piece of property is minuscule when compared to the amount that is being waived for the fully developed property. The total amount of taxes waived that we cite nets out the payment in lieu of taxes that are paid on the undeveloped property.