Tuesday, November 17, 2009

No DeTox For Addiction To Tax Freezes

Here we go again.

It seems that Memphis economic development officials have an addiction to tax freezes that the Betty Ford Clinic couldn’t cure.

Meanwhile, they have an obsession with North Mississippi that Sigmund Freud couldn’t have shaken.

As a result, real reform of our community’s Payment-in-lieu-of-tax (PILOT) program always seems just out of reach, and even when loosely grasped, it’s only a matter of time before the hoary justifications for giving away taxes are trotted out once again.

This time around, it's about giving tax breaks to businesses already in Memphis who are threatening to leave Shelby County. They have to have been here 10 years, to be investing $10 million and retaining 100 jobs. Someone should lock the key to the city and county vaults, because we predict a run on the bank by companies who say they are now thinking about leaving.

Unchecked And Unbalanced

Most troubling of all this is the fact that there are no meaningful checks and balances in deliberations like the one today before Memphis City Council to loosen up tax freeze policy again. Advocates for the change in policy are the same economic development officials who benefit from the change itself, and once again, in the absence of a comprehensive plan to shift our incentives from cheapness to quality, City Council members are susceptible to the self-serving analyses and recommendations.

Curiously, the only outside assessment of the city and county policies on tax freezes – which recommended common sense and reasonable reform – was forgotten almost before it was officially submitted for consideration. And although some of its recommendations were approved, the full impact of the well thought out report was never realized, and campaigns to water down the changes began almost before the ink had dried on the government resolutions.

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.

Quality Counts

These days, economic development officials act as if we all have amnesia and that our opinions about the overuse of this incentive have changed. While we’ve tried to give away the store, 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 today a magnet for young college-educated workers and skilled jobs. It identified key public investments to make this happen. It rejected the notion that it should sell itself at a discount to get jobs and people to move there.

Memphis took another road. It was rooted in “old school” economic development programs that sold our city 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.

Forbes magazine held up our PILOT program as the poster child for tax incentives run 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.”

No But’s

The third strike for the program was the thoughtful report by the city-county consultants. 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.

It seems a good time to remember what the consultants wrote: “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 that is being resurrected once again: “The company will move to Mississippi if it doesn’t get the PILOT” or “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 strict “but for” test was straightforward and encouraged good stewardship of scarcer and scarcer tax dollars. The consultants define “but for” as a business 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.

Getting It Right

“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 sell their cities on their quality, we come off looking desperate and unsophisticated, 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."

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.'"

Corporate Tax Dodging

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 expanding the basis for issuing yet more PILOTs.

As government officials consider what they’re going to do, we recommend that they 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.

“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.


Anonymous said...

All these academic theories sound good, but they're not practical.

Just look at North Mississippi's industrial growth. It was non-existant 10 years ago and now it's 20 million square feet, most of it Class A space. Also, the vast majority of new industrial development has been there. The main reason? Their tax freezes are much easier to obtain than Memphis and Shelby County's. Why don't you take them to task. DeSoto County has a three-sheet document in order to get a PILOT. Also, when they target a Memphis company, those jobs are new to Mississippi, meaning they can get state AND local incentives, whereas Tennessee doesn't offer incentives to keep companies. Memphis, with this retention program, will have a chance.
Also, it's cute to frame the debate by saying people are "obsessed" with North Mississippi, but it doesn't do much good. When companies like Williams Sonoma and Cardinal Health close Memphis operations and move to Mississippi, utilizing their tax abatements, it's not paranoia. Before you wrote this, maybe you should have taken some time to look at the numerous companies which have taken this path, instead of quoting some economics theory.

Smart City Consulting said...

We know this will be heresy in some circles, but we really don't care if distribution centers move to North Mississippi. Our emphasis should be about keeping the workers here where taxes are cheaper if you want to make the cheapness argument.

We've used up way too much of our land on warehouses and distribution centers that don't pay living wages and take up too much land that pays no taxes at all.

There's nothing in this for Memphians and that's the big problem.

If the problem is that the state of Mississippi has more incentives, then it would seem that our economic development folks and politicians should be in Nashville getting our state incentives straightened out instead of putting them on the back of Memphians.

Zippy the giver said...

Oh, if only they would listen.
But they won't, many people in government here are not listening because of vested interests. Look at the structure of the WWH/Bus station deal, then lok at the Buehler deal, then look at the money trail. It's the same people over and over. Most of what hey do is commit felonies and swear it's in the public's interest when it's really only in their own.
So, they won't listen. But, if people don't start reporting these crimes when they happen,

Chuck said...

Dear smart:

Anonymous 2:59 is either at the Chamber of Commerce or an owner of speculative warehouses. Chamber officials are the ones who said our taxes are not high enough to offer competitive incentives. Duh!

Location in north Mississippi is part of the Memphis economy, and the only losers are the real estate developers of warehouses and the staff they pay at the Chamber.

We should be focusing on livability in Memphis and Shelby County and eliminate PILOTS except in older parts of Memphis, where we could combine them with New Markets Tax Credits, HUB Zones, and CDBG support.


Zippy the giver said...

Meanwhile, CHINA who has a plan that they have implemented years ago, decades ago, has moved out of the 18th-19th century and into the 22nd already, yeah, they have a highspeed maglev public transportation for their citizens.
We have a trolley.

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