Wednesday, August 16, 2006

How About Toning Down The Apocalyptic Rhetoric And Amping Up Reforms Of Tax Freezes?

Surely, Memphis Councilman Jack Sammons kicked himself this morning when he read his comments in The Commercial Appeal justifying the way tax freezes are handed out by Memphis and Shelby County Governments.

If he didn't, there’s probably plenty of economic development officials who’d be glad to do it for him. His comments were the exactly the kind that make the backs of their necks tingle, because by now, the newspaper article has been posted on bulletin boards at all the chambers of commerce competing against this community for new jobs and new investment.

It’s hard to believe that he really said it, but here it is: “I’m one of those guys out there operating a small business without a PILOT and I don’t have any trouble with those that are getting them. We don’t have the mountains, we don’t have the beach, we don’t have MIT or Stanford or some institute of higher learning spitting out a surplus of highly educated folks, and the crime rate here is higher than in other places.”

Lord, protect us from our friends; we can handle our enemies.

The Real Questions

But more to the point, his comments beg the questions: if all of those things are true, how does throwing tax money away with unnecessary PILOTs (Payment-in-lieu-of taxes) solve the core problems? Wouldn’t we be better off targeting tax freezes more wisely and strategically so we have more tax money to spend on improving our natural assets, investing in higher education and fighting crime.

As one of those small businesses for whom he seems to be speaking, we want to make our position exceedingly clear. We do have trouble with tax freezes giving out indiscriminately by the Memphis and Shelby County Industrial Development Board to any living, breathing person who can manage to complete the forms.

It’s amazing – and mostly discouraging – that nine months after Memphis and Shelby County Government received the definitive, common sense recommendations contained in the best consultant’s report ever commissioned by local government, none of the recommendations for improving the PILOT program has been enacted.

Memphis City Council now says it will finally getting around to doing something on September 19, but don’t hold your breath. Developers and real estate interests – long the heart of the political contributors’ system – continue to lobby against any major changes from being enacted.

It’s About The Real Estate, Stupid

Speaking at the same meeting and on behalf of the major real estate firms, Al Andrews, the head of the local Panattoni Development Company, pleaded for the Council to move carefully or risk the city’s warehousing and distribution jobs. In truth, if Memphis and Shelby County are placing their economic futures on the altar of low-paying, low-skills jobs that are so often the beneficiaries of these generous public tax waivers, we’re already in more trouble that we think.

In the increasingly interrelated world of the global economy, there’s little long-term chance of competing and winning for these kinds of job with Third World markets that can always undercut us. It’s a reality that is slowly unfolding, but its pace will only quicken in coming years.

As successful cities are already proving, the economies that are winning are those investing and offering high quality workers, an entrepreneurial environment, a healthy research climate, quality higher education and a satisfying quality of life. Instead, you would think that we should place all of our economic development bets on warehouses and distribution, or God forbid, DeSoto County will get them.

Keeping Perspective

As we have said before, the past decade has been a boom time for real estate developers, and the waiver of $60 million in taxes through the PILOT program is a large reason that has been so. It was no mere coincidence, because our economic development programs are too often real estate development disguised as serious strategy.

Despite all the gnashing of teeth and comments like Councilman Sammons, to this day, no one has explained why Memphis and Shelby County have approved more than half of the state’s tax freezes – 809 of them in a 10-year period – when Nashville has approved only five. Yes, five. In fact, our local governments approved more tax freezes than Nashville, Chattanooga, Jackson and Knoxville combined.

Sometimes, in the midst of the rhetoric, it’s hard to remember that no one is suggesting that tax freezes be eliminated. Surely, however, we can all agree that their number needs to be drastically reduced, targeted and only given after a company proves a real need for the incentives.

Unfortunately, even with the changes, our tax incentives still won’t address the real sources of economic growth – small businesses and entrepreneurs. As a small businessman, surely Councilman Sammons can agree to this. After all, more than 80 percent of all new jobs in Shelby County come from small businesses like his.

Basing The Future The Cheap

Memphis and Shelby County will only succeed in the long run if we abandon tired strategies based on “out-cheaping” other cities and instead create talent strategies and incentives for entrepreneurship. That’s where the economy is going while we’re still debating incentives for warehouse workers.

Despite the lethargy exhibited by city and county governments on fixing a badly broken system, there is some good news. The recent tax freeze for a badly needed major project at Main and Jefferson was exactly what they were created for. The CCRFC has always seemed more diligent about its stewardship, and hopefully, soon, it will reexamine the lengths of the tax freezes to see if they can be reduced.

If downtown is in the midst of a renaissance - the operative word these days - then surely 15-year tax freezes should be scaled back. It’s a little disconcerting to think that this year’s second graders will be graduating from college just in time for some of these projects to begin paying their shares of property taxes.

Meanwhile, Carol Hardy, manager for the Molson Coors Brewing Company plant planning shut down in the near future, gets our award for IDB recipient of the year. Although she’s a political insider and even serves as a member of the IDB, her request for a tax freeze was for seven years, although clearly, she could have used her behind-the-scenes influence to hike it.

Good News

We don’t want it to sound like there’s no good news from the City Council. It is finally adopting the position that PILOTs are public investments being made by Memphis taxpayers, and if companies expect to get them, they have to show benefits to the people paying the tab, either in a living wage and medical benefits, or 75 percent of the employees living in Shelby County or other clear public policy objectives.

We know old habits die hard, as Councilman Sammons proved yesterday, but it’s time to kill a message that if we can’t be cheap, we might as well forget it. It’s the sort of attitude that guarantees we will win a race in the competition for economic growth – the race to the bottom.


bob said...

A bit harsh to say NO. There's one justification I can think of. Reconfigure it as a new-jobs credit.

Smart City Consulting said...

New jobs are a major factor on the matrix that is used to set years for the tax freezes, but unfortunately, there is no criteria that says "new jobs that at least pay the per capita income for Shelby County." It's about the right kind of jobs, not just new jobs. But you probably were thinking of that, we suspect.

bob said...

Yes I was. To me, new jobs doesn't mean 90 executives moved over from the old HQ, who may or may not actually be living here. It also doesn't mean crap jobs, either.

Come to think of it, I really meant new jobs and training credit, with very strict measurements, where you get paid when you prove that you did the job creation. And also, maybe tax-reduction expenditures ought to be disclosed as exactly that - expenditures.

Your new headline is an improvement.

Anonymous said...

I've seen politicians bought for the price of a nice steak dinner, maybe an outing to the game, or such. Look at the disclosures of the council members and I'll be you see the beneficiaries of the PILOTS. What think ye?

sherman said...

Put me down as a small business owner here who doesn't agree with giving handouts to companies who are moving here anyway because it is cheaper to do business here.

Even an idiot like me can figure out that if these new businesses don't pay taxes, then we will be paying theirs for them.

I don't understand this incentive policy. It is a slow death to Memphis taxpayers, self-inflicted by politicians.

mike said...

A minor nit in your post: Distribution and warehousing are not something that can be farmed out to "third world" countries. Manufacturing, yes; moving the final product to American stores and homes? No.

Memphis lacks a lot of bargaining chips. Tax breaks and cheap land, along with cheap labor, are all we've got right now. Unfortunately, shifting the tax burden onto a narrow slice of Memphians only makes things worse.

But you're right in that staking a community's future on one general, low-skill, low-wage industry and a handful of major businesses is bad public policy.

I've been coming to believe of late that "fixing" our underclass problem is the priority to getting Memphis back on track. A lot of the priorities that SMC has will simply not do anything about the problems arising from the huge numbers of badly educated, untrained and (it must be said) morally weak people in the city. Or will not produce results for a generation or more.

You can attract and import (or keep in town) all the talent you want, but with the anchor of our underclass chained to them, you'll not get too far. You can design a city that appeals to middle-class and elite tastes but the underclass will only resent it, and the money spent. Bringing up the underclass (sorry to abuse that word) should at least be a simultaneous part of the strategy.

Anonymous said...

Bravo Mike

Smart City Consulting said...

Mike: Thanks for the comments and good point. Everything that we do around here should be aimed at somehow improving the malignant poverty that is the seedbed for so many of our most difficult problems.

That said, however, part of the problem around here is that we can't do anything because we're so different and so our problems are bigger and more complicated than anybody else's. We do it with everything from the structure of our governments, tax burden, public education, competitiveness issues, and more. Other cities have similar demographics, similar troubling results from their schools, similar workforce issues, etc., but by aiming higher and thinking innovatively, they compete and win in the fight for new jobs and new businesses. And all without giving away the store or selling their cities at a discount. We seem at times to be so busy wringing our hands and handing on to crutches that justify our inaction.

As long as we think our land has to be cheap and we have to give away taxes to compete, we've already lost. The answer to so much that's wrong with Memphis is about attracting, retaining and developing new talent, investing in the jobs of the new economy, growing in a financial and sustainable way and building a better quality of life.

These do in fact have important impacts in dealing with the "underclass." Until we do something more profound and innovative to improve the underpinnings of the community, we continue to deal with symptoms of the problem while never finding the solutions that we need right now to be competitive. Cheap land and tax breaks beget low-wage jobs and low-skills jobs, which in turn beget the underclass, which in turn begat cheap land and tax breaks.

From where we sit, every priority that we have here and the issues that we emphasize on the blog directly result in a safer, healthier, better, fairer, more competitive Memphis.

The ultimate answer is not to deal with teenage pregnancy, dropouts, workforce issues, etc., but to set out to actually change things here, we'll have the problems to which you refer.

If other cities can quit wringing their hands and get off the mourner's bench, surely we can, too.

Smart City Consulting said...

Anonymous: the political connections that you refer to are public record and a fact of political life.

Sherman: well-said. It is slow death. Also, if we are so serious about rejuvenating the music industry here, where are the business incentives for it? Other cities are pioneering tax credits and tax freezes for musicians, rehearsal space, and more, while we talk about how important Memphis Music is, but do nothing to create the incentives for it to thrive.

Smart City Consulting said...

Bob: Thanks for the clarification, which was precisely on point, in our opinion. Glad you liked the new headline. We get these posts up so quickly that we're often editing them and working on them on the fly.