Tuesday, June 19, 2007

State Legislators Zone Out On Amendments For Special Interests

Where’s URS Corporation and NexGen Advisors when we really need them?

Remember them. They were the consultants who produced the 97-page report on the city/county Payment-In-Lieu-of-Tax (PILOT) program that led to its much-needed overhaul.

At the rate things are going, we’ll soon need to get them back to bring some sanity to the use of tax incentives of the Tourism Development Zone (TDZ).

Leave it up to state legislators to take what seemed like a good idea – to pay for convention centers with new taxes generated by the new development around them – and bend it to the breaking point.

Peter To Pay Paul

The TDZ law has been on the books since 1998 and a few have used it to pay for their new or expanded convention centers. Here, we didn’t need it to pay for the convention center, but we did need its revenues so we could move the hotel-motel taxes used for the convention center over to the FedExForum and replace them with the tourism development zone revenue.

Imagine, just a few years ago, that convoluted process was used, because it was deemed easier to amend the state hotel-motel tax law than the TDZ, which was considered untouchable.

Boy, how the times have changed. This year, it was the legislative equivalent of the Gold Rush as a flurry of amendments were introduced in the Tennessee Legislature to broaden the use of the tas to benefit private projects.

Pick A Project

The amendments called for TDZ revenues to be used for everything from Graceland and Opryland Hotel to the Mid-South Fairgrounds and Murfreesboro’s Bible Park U.S.A. Just for good measure, there was also the Pigeon Falls Condos at Pigeon Forge.

To some in local government, it looked like the state legislators had lost their mind. But if they were crazy, they were crazy like a fox.

After all, for them, this is the best of all worlds. They get credit for helping out the politically powerful and to say thanks to special contributors, while shoving the burden back to local government to be the ones who say no or to live without the new revenues.

It’s About Who You Are

It’s maddening to think that Mayor A C Wharton has begged to no avail for years just for a small measure of flexibility in creating new county tax sources. That concept was just too much for the legislators to even consider. Horror of all horrors, they didn’t want to be accused of passing a new tax, and yet, this year, they cavalierly give away the money of local government.

All in all, it just emphasizes the parallel universe that is the Tennessee Legislature, and the ease in which hypocrisy is swallowed whole and without comment, such as when someone like Rep. Curry Todd says no to tax relief year after year, but enthusiastically supports any TDZ amendment that comes his way.

As an observer of the Legislature emailed recently, “It’s enough to undermine what little confidence the public has in the integrity of the state legislative process, but most of all, it sends the irrevocable message there are special rules for special people.”

A Simple Premise

The TDZ legislation was originally passed to allow an East Tennessee city to pay for a new convention center, and the idea was pretty straightforward: the bonds issued by the city would be paid off by the new revenue created by the new convention center and the revitalization of its neighborhood.

The city government would set a baseline for current revenues, and it would continue to get those, but the incremental increases in taxes would go to pay the bonds.

After its passage, cities weren’t exactly lining up to use it for new “qualified public use facilities.” After all, most of them – like Memphis and Shelby County - already had the hotel-motel tax on the hook to pay for their convention centers.

Knocking Over The Dominoes

The TDZ rocked along quietly for almost a decade until some special interests thumbing through state tax policies, looking for new ways to pay for their pet projects, stumbled across the Tourism Development Zone legislation.

It was like knocking over dominoes. Once the first amendment for use of the TDZ taxes came in, they all tumbled in.

In truth, most didn’t have any rhyme or reason. Or at least any details.

Here, we now have the Fairgrounds qualified under the TDZ, and we don’t even know what’s to be built there or what it will cost. But we supposedly know that it’s going to need a public subsidy to make it work.

Calling In The Reserves

This is why we thought of the PILOT consultants.

If it’s clear, as research has now proven, that it is a popular myth that tax breaks are responsible for companies locating or relocating or expanding, it’s also a myth that these proposed projects could not happen without TDZ support.

If that’s the case, let’s allow the private developers to prove it. As the consultants said about PILOTs, the people asking for the public subsidy (and that’s what it is) need to prove they need it.

What If – But For

The consultants called this the “but for” rule. The consultants defined this way: a private investment in Memphis isn’t reasonably expected to happen “but for” the public incentive. This, they said, could be proven by a “gap analysis, a competitive cost analysis, or a combination of the two.”

This puts the emphasis back where it belongs – back on making sure that the best rationale is used for deciding where the public’s scare tax dollars are invested.

Without a “but for” test, the consultants said: “This, for all practical purposes, means that the city/county or other approving bodies may very well have been giving away tax revenue unnecessarily as opposed to gaining taxes…”

Putting Up

We are not saying that none of these are not meritorious projects. What we are saying that if they want public investment, they need to prove that they need it.

To quote the PILOT report again: “The establishment of a ‘but for’ test is the whole premise of any public investment or the need for it from a logical, moral, and legislative standpoint.”

Fortunately, the Memphis City Council and the Shelby County Board of Commissioners agreed with the consultants and tightened up the rules for the tax freezes of the PILOT program. We’re hopeful that they be similarly dutiful when it comes time to approve the TDZ uses.

TIF for Tat

It’s curious that such a flurry of amendments would materialize this year. After all, Tax Increment Financing (TIF) is still legal in Tennessee. Of course, it’s proven difficult to get city and county legislative bodies to create TIF districts, because of their concerns about eroding public tax revenues.

Sometimes, it’s as if the TDZ is being pursued because even if it is essentially a mutated TIF by another name, it’s more politically palatable and doesn’t trigger as many questions as a TIF.

Of course, passage of the amendments in Nashville was only the first hurdle. The highest hurdle will have to be cleared before City Council, and they may think that the wiser course is for worthy projects to be included in the normal Capital Improvements Project (CIP) budget and handled like all the others.

Balkanizing Memphis

To some, the creation of all these special taxing districts is nothing more than the balkanization of Memphis, where enclaves of special interests wield special power and get to play by their own rules, eroding the sense of fair play and community that hold a city together.

We don’t blame the people who went to Nashville to get their amendments passed. They were simply using the system to their advantage. The question always is who will use it for the public’s.

Because of this context, when we read the amendments, we were struck by the unintentional irony of the boiler plate language that is included at the end of every state bill: “This act shall take effect upon becoming law, the public welfare requiring it…”


city watch said...

Dear Smart:

Is there a TDZ around the convention Center or around FedEx Forum? Is any land outside of the current Fairgrounds included in the new TD Zone? Do we have a TIF District in Memphis?

Smart City Consulting said...

City watch:

Uptown is a TIF district. The TDZ district can extend to one mile beyond the project being funded. The TDZ was created around the convention center (but because of the one-mile rule, it includes most of downtown), which allowed the city/county to take the hotel/motel tax being used then for the convention center and move it to the FedExForum.