Tuesday, December 16, 2008

It's No Time To Thaw Out Bad Tax Freeze Policies

The Greater Memphis Chamber – whose renaming apparently takes off some of the pressure to lead regionalism by removing “Regional” from its name – celebrated all that is right about Memphis last week, featuring some of our city’s most recognizable celebrities and boosters.

The goal was to create a new current of optimism in and confidence about Memphis – a spirit often sorely wounded by brutal statistical indicators of our uncompetitiveness – and it was a reminder of what a mythic heritage there is here and what a special place it is. Still.

Most of all, it was a reminder of how the intangibles in Memphis are often more powerful than the tangibles. Of course, the problem is that it’s hard to sell intangibles in the cut-throat world that is modern economic development.

This and That

While we don’t have an imposing skyline, we have the authenticity of Cooper-Young and South Main.

While we don’t have the kind of vibrant downtown that other cities boost, we do have a growing café society and an ever impressive neighborhood-based activism that can transform our city much as it did in Portland over the past four decades.

While we don’t have booming reinvestment like many cities, we do have great bones with the historic buildings that still remain standing here, waiting for the day for economic revival.

But more to the point, Memphis is about the indescribable, palpable feeling in the air, an attitude, a bit of a chip on the shoulder, a funky feeling, a rhythm that stems from our legendary music and our legendary river. There’s also an underpinning of personal warmth and generosity that’s embedded in our culture.

Then, there’s the “plug and play” openness that allows almost anyone with a passion to find a place to pursue it and to be invited into an organization working on the problem.

Logo Progress

A new logo was also unveiled, and it’s a welcome new image for our city – solid, imaginative, adaptable and a platform for creative messaging. It’s a three-dimensional “M” that’s malleable, becoming a putting green, a river, a road, an airport and more. Best of all, it should send to the dustbin once and for all the “swoosh” that was already a cliché when the Chamber added it to its name years ago.

Then, even better, the new logo has no cutesy tagline or bumper sticker slogan. The “M” says it all. It stands for it all. It’s a solid, clever, new symbol for Memphis.

It’s because of the celebration spotlighting all that is right and special about Memphis that it’s makes it even stranger that economic development types and businessmen are working well below the radar to change some of the rules that were enacted little more than 18 months ago to improve a PILOT (payment-lieu-of-taxes) program that waived taxes almost indiscriminately.

Out Of Control

The tax freeze program was so out of control that it was criticized by everyone from pro-business Forbes magazine to researchers, and most of all by city and county governments’ own consultants, URS Corporation and NexGen Advisors, who called for major overhaul of the program in its 97-page report issued December 1, 2005. Even then, it took more than a year for local government to get around to reforming the PILOT program, which has always been more about real estate than economic development.

But, most importantly, the tax freeze program lost public support and credibility because of the Memphis and Shelby County Industrial Development Board’s pro forma approval of any application whose paperwork was filled out correctly. But most damning of all, in a 10-year period, for every tax freeze approved in Nashville, Memphis approved 83 totaling about $60 million, a total that was more than the other major cities combined.

Decades ago, Nashville decided to send a message about quality government, quality of life, and quality of public investments. It set out to execute “quality strategies” that make it a magnet for young college-educated workers and skilled jobs. It identified key public investments to make this happen. It rejected the notion that a city should sell itself at a discount to get jobs and people to move there.

The Road Too Traveled

Memphis, meanwhile, took another road. It was rooted in “old school” economic development programs so our city was sold on the basis of cheap land, cheap labor and cheap taxes. Ultimately, what we’ve learned is that throwing money at companies to convince them to love us is not only poor public policy, it is also counterproductive, stimulating higher tax rates that choke off the small businesses and the entrepreneurs who create most of the new jobs in the first place.

Three years ago, we had several warning signs that we were on the wrong path. Two George Mason University professors studied the IDB program and concluded that it was characterized by fatal flaws, such as erroneous calculations, fallacious assumptions and errors in fact.

If that wasn’t warning enough, Forbes magazine held up the local PILOT program as the poster child for tax incentives gone amok: “Targeted tax cuts aimed at attracting particular employers are bad policy. For decades now targeted tax incentives have been a favorite elixir of state and local politicians in depressed communities. But targeted tax incentives don’t spur real growth. Quite the contrary…tax incentives are inevitably financed at the expense of established businesses. Today’s winner of a targeted tax break is tomorrow’s victim of a broad increase in business taxes.”

And You’re Out

The third strike for the program was the thoughtful report by the city-county consultant. One of those recommendations – the so-called “but for” test - was for companies asking for tax freezes to prove that they need the public investment (and that’s what it is) to make their projects work.

Here’s the thing: We don’t quibble with some of the “housekeeping” kinds of changes that are being proposed by the business community, especially the requirement that 75% of a company’s employees must live in Shelby County. It’s largely unenforceable, and as we wrote about police residency requirements, the trick is in creating a city where people choose to live. Force is never a successful public policy.

That said, there is rumbling that some business leaders want to water down the “but for” test. If they do in the end ask for such a change only 18 months after it was implemented, it should be turned down summarily.

What He Said

It seems timely to revisit what the consultants wrote in their report: “The current matrix approach (the score sheet now being used to award tax freezes and set their terms) for awarding PILOTs should be abandoned and replaced by a ‘but for’ test or the true economic need of the project.”

This was what was always missing from the PILOT process. Instead of an emphasis on facts, there was an emphasis on rhetoric: “This company will move to Mississippi if it doesn’t get the PILOT,” “This company is looking at locations in Indianapolis right now,” or “This company wants a sign from government that Memphis values its presence.”

In truth, this “but for” test is straightforward and good stewardship of scarcer and scarcer tax dollars. The consultants define “but for” as a private investment that isn’t reasonably expected without the public tax freezes, and it can be proven by a “gap analysis, a competitive cost analysis for competing sites, or a combination of the two,” the report states.

But For…

“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,” the report said. “Most, if not all, business incentive programs across the country imply a ‘but for’ test in their intent and enabling legislation.”

Previously, we’ve expressed our concern about the pervasive feeling of unworthiness that is found in Memphis, and which is mirrored in public policy like the PILOT program. It embodies the attitude that we aren’t worthy to have new business and business expansions without bribing them. Is it at all possible that unlike the other cities who ask for justification or sell their cities on quality rather than cheapness, we come off looking desperate and less professional, and a result, we give more than necessary?

We think David Birch, former Harvard and MIT academician and now president of a company that advises companies on where to locate, said it best: "The cities growing fastest right now have the highest taxes, most expensive workers, most expensive land...To say you want the cheapest worker is an old way of thinking. What you really want is a talented labor force, not the least expensive labor force." Birch says the days are over when companies selected locations for new factories or offices on the basis of where business costs are cheapest.”

Focusing On The Right Thing

Or as Professor John Eger puts it: "The effort to create a 21st century city is not so much about technology as it is about jobs, dollars and quality of life. In short, it is about organizing one's community to reinvent itself for the new, knowledge-based economy and society; preparing its citizens to take ownership of their community; and educating the next generation of leaders and workers to meet these global challenges...At the heart of this effort is ultimately defining a 'creative community.'"

In the end, it seems logical that the overriding question about tax freeze policies is whether they are encouraging the reinvention of Memphis into a creative community, a city of choice, known for its quality and innovation. The answer seems obvious, and so then is the rationale for refusing to roll back changes that came from the PILOT reforms.

As county government considers what it's going to do, we recommend that officials listen to the Smart City interview with Greg LeRoy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. He said: “There’s a popular myth that’s promulgated by companies and their consultants and their public relations machines suggesting that tax breaks are responsible for companies locating or relocating or expanding. I think that’s just not true because all state and local taxes combined has a cost of doing business for the average company in this country of less than one percent of their cost structure.

Everybody’s Wrong But Us

“Tax breaks, therefore, comprising some fraction of less than one percent of a company’s costs can’t create markets, can’t drive innovation, can’t drive skilled labor. It’s really become a way for elected officials to take credit for things that are already going to happen in the market. And by letting these programs become so loose and allowing them to become pro-sprawl, we’ve also allowed these incentive programs to turn into things that are really harming our land use, undermining our public schools, forcing people away from transit…”

Mr. LeRoy suggests that programs like ours are in truth real estate development masquerading as economic development. “We hope elected officials look at the broader policy issues about how policies affect everybody paying taxes to the city, to the county, to the state, and what’s really going on is a burden shift in which companies that are foot loose, or threaten to be foot loose, are getting lots of other people to pay for their public services, because when a company doesn’t pay its fair share of the cost of public services it uses, everybody else either has to pay higher taxes or get lousier public services.”

Amen. And we pray that no one thinks now is the time to return to policies that were key to creating the low-wage, low-skill economy on which we are too dependent.

3 comments:

b said...

When is the new, rebranded Greater Memphis Chamber going to update its website?

www.memphischamber.com

To make a big announcement about a new direction and not bother to pair it with a website revamp to announce it beyond the confines of "greater Memphis" is. totally. lame.

Don't they realize the people they really want to know about this aren't the people who came to The Peabody?

Anonymous said...

And don't ever let anyone forget that whenever you hear some official tell you that government is so complicated that you can't possibly understand it that THEY ARE ON THE TAKE.

If I've learned one thing since being in Memphis it's this:
"DON'T TRUST ANYBODY".

victor said...

its really intresting ,, very nice thought
thanks



___________________
victor
HD Access for just $10 a month to your FAVORITE Channels!