Friday, May 26, 2006

The IDB Parallel Universe

Government officials and agencies have an aversion to admitting they’ve made a mistake, but no agency is more tone deaf than the Memphis and Shelby County Industrial Development Board.

Case in point. Yesterday, on the same day that Shelby County Mayor A C Wharton was in Nashville, engaged in hard-nosed negotiations to get more revenues for his cash-strapped government, the IDB is at the same time giving away $820,000 in taxes for two more questionable applicants.

Being stubborn is one thing, but the board’s actions have long since reached the stage of irresponsibility. Not only does its continued rubber stamping of tax freezes fly in the face of the opinions of most taxpayers, but it’s just simply bad public policy. Period.

Unfortunately, in recent months, there has been a lot more talk about reining in the board’s authority than action. Normally, talk is cheap, but not in this case. While city and county governments debate what should be done, the IDB simply goes on its way, with each approval adding to the $50 million a year in taxes already waived in Memphis and Shelby County.

Meanwhile, in Nashville, the county’s mayor has to suffer the indignities of going to Capitol Hill, hat in hand, to plead for the state’s largesse in granting him a new tax on development. In the end, he is able to get $5 million this year, or roughly the equivalent of 10 percent of the total amount being waived by tax freezes annually.

An Oblivious IDB

The IDB meanwhile acts as if it’s oblivious to the way that it is compounding the financial woes of city and county governments. It is so single-minded that it sees no broader responsibilities to the community, such as using tax freezes only when absolutely necessary to close a deal for quality jobs in a targeted industry.

Yesterday, the board gave preliminary approval to two more pedestrian applicants – one with a habit for posting losses and another in the habit of paying welfare wages. The new jobs created by the companies actually drag down the per capita income of Shelby County, because the average salary of one company was $32,000 and salaries at the other company average $22,880, both below the county’s per capita income of $34,000.

So, clearly, it’s not the strength of the salaries that got their taxes waived. Rather, it must have been the capital investments of $4.2 million and $2.1 million, once again making the point that the PILOT program is a real estate development program masquerading as economic development.

The company paying the average wages of $22,880, Knox St. Clair, a supplier of interior doors and windows, is paying so little that its 32 new employees will be eligible for food stamps and human services on the day they start their new jobs. In other words, taxpayers are not only subsidizing the company’s bottom line with the tax freezes, but we may also be subsidizing it by providing its employees public assistance, public health and human services programs.

These kinds of tax freezes say volumes about the IDB’s long-term vision of Memphis and Shelby County as a center for the low-wage, low-skill jobs that it so easily approves. It certainly didn’t engender any great feelings of pride for us when an official with one of the companies took his tax freeze and praised Memphis’ “highly-skilled distribution workforce.” That, in a phrase, is the legacy of the IDB.

Low-wage Jobs

In effect, the low-wage jobs being given tax freezes have hidden costs, and as we’ve suggested before, the evaluation for all tax freezes should include all public costs, not only of roads and interchanges, but public health care costs, utility subsidies and housing assistance for low-wage employees.

In Minneapolis, for example, companies seeking business incentives must provide the names of all programs to which they are applying, profiles of their workforce, projections of future wages and the total cost of public assistance for their workers.

Amazing as it sounds, there is no effort to connect decisions about PILOTs to a more comprehensive, overall plan and to place the emphasis on areas where the existing infrastructure had already been paid for by local taxpayers. As a result, PILOTs approved by the IDB cause local government to spend more money to build roads, bridges and sewers, however, these factors aren’t considered in the evaluation process.

That’s why we have made our own recommendation. Every PILOT should have a “fiscal note” that tells not only the amount of taxes being waived, but any other costs that will have to be incurred by taxpayers, whether it is for a new road or food stamps for workers.


Decisions about tax freezes shouldn’t be made in isolation, and if we are to act as investors, we are entitled to know the entire investment that we are making in each company.

The heart of our economic development policy should be increased opportunity, better jobs and bigger paychecks. Tax incentives should be aimed at achieving all three objectives, because if government is a party to a process that puts its own citizens in low-wage, dead end jobs, it is not just bad public policy. It is the most cynical kind of public policy.

That’s why it’s disheartening that the common sense recommendations of the consultants who studied the tax freeze programs continue to languish five months after they were issued and business as usual continues.

At the end of the day, the recommendations go a long way to putting the emphasis on tax freezes where it belongs – back on an understanding that this is the public’s money, and it must be invested wisely and in a more targeted way.


Larry said...

Ahhhh, here we find some more common ground. I read about some of the PILOTs awarded the other day wonder about the value of them.

The idea of fiscal note is a good one. All the bills in the state legislature in Nashville have a fiscal note attached. I think it would be a good idea for PILOTs and city ordinances to do the same.

Anonymous said...

Great post.

It would be interesting to see a comparative study of the use of PILOT's in other cities versus the use of TIF programs.

I know Nashville sparingly uses PILOT's, relying instead on TIF's.

Smart City Consulting said...

Anonymous: In a 10-year period when Memphis/Shelby County was granting 415 tax freezes, Nashville/Davidson County approved five. 51% of all the tax freezes in all of Tennessee were granted here, more than Nashville, Knoxville, Chattanooga, Jackson, Oak Ridge, Kingsport/Bristol, and Clarksville COMBINED.

e said...

This is a great article! I run BNSF wants to build an Intermodal here, and their developer of course wants tax breaks. Can you advise me where I could find a copy of the agreement between the IDB and Memphis? Any other comments on BNSF in Memphis?

Thanks! Eric

Anonymous said...

What happens when Knox St. Clair decides it has to downsize? Their new warehouse and headquarters which they purchased with the help of a PILOT, is on the market for $1.5M.

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