Politics, like life, is all about timing.
That’s why you would think that the proposal for county government to put $5-6 million into a proposed development on the “Highland Strip” would be problematic; however, it passed 7-2 in a committee of the board of commissioners yesterday.
The vote comes less than a week after Mayor A C Wharton advocated a privilege tax, aka payroll tax, to cope with the county’s dire budget challenge to fund safety net services like The Med. We’ve been advocating a payroll tax as part of comprehensive tax reform for three years, because it requires the 88,000 people commuting into Shelby County to work to contribute to its infrastructure and services.
Dialing For Dollars
But that plea for a new tax on wages was expected to make it hard for the Shelby County Board of Commissioners to join Memphis city government in ponying up its half of $10-12 million at the behest of private developers and the University of Memphis who see a brighter future for the once thriving Highland Street neighborhood business center.
But it didn’t create any serious problems, although some questions remain to be answered by the project’s champions for the Tax Increment Financing (TIF) district that’s at the heart of the Highland Street project, and more to the point, questions about local government policies and guidelines for these kinds of tax incentives in the first place.
After years of handing out tax freezes in their PILOT (Payment-In-Lieu-Of-Taxes) program to essentially all comers, city and county governments finally just now have put the brakes on those runaway tax incentives. Now, those tax freezes for new business and expansions have standards and priorities for the first time, doing more to align the incentives with public priorities and also to “size” the public incentive to the promise of specific economic benefit.
The Missing “I”
The pressure to reform the tax freezes was spurred on by the deepening concern about the loss of taxes by local government, and the TIF would divert future taxes to pay $10-12 million public bonds for the so-called “public improvements,” largely a new parking garage whose fees would apparently go to the developers.
Really, this specific project is more a TF district rather than TIF. That’s because there’s not really an increment in it. In similar districts, the present level of tax revenues continue to go to local government, and it’s the growth in the tax base that goes to the TIF district.
On Highland Street, because the project is on the site of a former church, there is no increment, because the church was paying no taxes at all. In other words, city and county governments don’t even get a tax credit for at least the value of the land.
The Welcome Mat
Impetus for the project appears to come from plans to build a Highland Street entrance for the University of Memphis. Based on what we’ve seen, it would provide our university with a dramatic, much-needed sense of arrival with a striking front door to the west.
Here’s the question being asked by leaders of neighborhood organizations across Memphis: The overriding criterion for a TIF district is to improve an area fighting severe blight, and compared to their neighborhoods, they suggest that Highland Street doesn’t hit the legal requirement for blight. (The only other TIF in Memphis is the Uptown district, a textbook case for this kind of incentive.)
Even the report by the Community Redevelopment Agency, where the TIF recommendation originated, seems tepid, grasping at a definition of blight that includes faulty lot layout and inadequate parking facilities. That could apply to sections of Germantown, but more to the point, if Highland Street sets the definition of blight, most of Memphis could end up in a TIF district.
More To Come?
Some questions about the Highland Street project stem not from the project itself, but a lingering concern that years of talk in City Hall about the need for more than a dozen TIF districts will result in a flurry of applications for the special tax districts. As a result, there’s the sense that there needs to be an overall battle plan if commissioners are to make best use of this business incentive tool.
The need for an overall philosophy and comprehensive strategy speaks to the nature of government itself. Too often, it’s the nature of the beast for elected officials to be in a reactive mode, acting when proposals come to them, like the one to invest in the development project on Highland Avenue, rather than on the basis of an overall vision for strategic investments. Perhaps, that’s what led to one-third of Chicago being turned into TIF districts; in Cook County itself, there are more than 370 TIF districts collecting about $700 million a year.
Because of the lack of a full framework for these decisions, they become one-off decisions. In the context of an overall strategy for neighborhood revitalization, the Highland Street development could well deserve strong board of commissioners’ support, but in the absence of an overall plan for the entire city, it feels a bit like shooting in the dark, a familiar feeling for some commissioners, but nonetheless uncomfortable, in the absence of the big picture.
Payback, Not The Political Kind
While we have no reason to question the economic impact numbers and return on investment numbers in the Highland Street application for a TIF, these kinds of numbers are the grease that lubricates pleas for public money, whether they are used in TIF’s, TDZ’s (tourism development zones) or PILOT’s that promise boosts to the economy.
Most of the time, there’s no accountability in the process for these numbers. With the PILOT program, city and county governments proved that they could inject more rationality into the process; however, with other tax incentives, there’s no requirement that the promises made to get other tax incentives will be met or the public funding will be revoked if it isn’t.
If developers are confident about the numbers that they put out in support of a project, there would be a higher level of commitment by county government – not to mention its taxpayers – if the private sector would sign an agreement that protects taxpayers if those outcomes aren’t met. For example, in return for the public money, perhaps, they should agree to repay the public investment if the private economic spinoffs aren’t realized.
A Good First Step
It would be a step in the right direction – taking a businesslike approach to the public’s business. It’s also the kind of negotiated relationship that experienced developers and business leaders are accustomed to and in which the public sector is routinely outmaneuvered.
As for this particular kind of incentive, Tax Increment Financing dates back to the early 1950’s when it was created in California state government as a way to produce matching funds for federal grants. From that beginning, it has evolved into a popular tool in cities across the U.S. (only Arizona doesn’t allow TIF’s), and they have general requirements: a specific area characterized by blight, a specific plan for improvements, bonds issued to pay for the improvements, improvements that attract private investment which increases values and taxes, which are then used to pay the debt service on the bond.
Got it? Suffice it to say, it’s a gift to developers, but then again, it’s the developers who are often key to making it successful.
Learning From The Past
However, if the lessons of our experience with the PILOT program teach us anything, it is the need to step back, set clear expectations and priorities on the front end for local government and to target incentives to accomplish those priorities. In this vein, the new “but for” criteria being used as the basis for all PILOT’s makes sense for TIF districts, too. In other words, to get the public incentive, the developer has to prove that the property would not be developed “but for” the TIF.
In the end, a TIF is a calculated risk for government, because it is built on the premise that they will be self-financing – more development, higher values and more taxes. When that doesn’t happen, there’s not enough new incremental revenue to pay the bond debt, and costs often fall to local governments. Developers for the Highland Street project say the risk there falls to bond holders rather than government.
But there’s other reason for more thoughtful discussion and decisions about tax incentives generally. According to the Tennessee Advisory Commission on Intergovernmental Relations (TACIR), “though there is some disagreement in the literature, the preponderance of evidence in recent studies show that a TIF is more likely to shift investment from one area to another than to create new investment…among other things, a well-regarded study…concluded, among other things, that ‘evidence shows that commercial TIF districts reduce commercial property value growth in the non-TIF parts of the same municipality.’”
Improving The Incentives
Finally, according to the report, there are a number of improvements that are needed for TIF programs:
* Define “blight” more narrowly
* Require a reasonable showing that TIF revenues will pay development costs
* Increase public involvement
* Increase communications and partnerships between the TIF authority and any affected tax districts
* Exempt certain revenues, such as those earmarked for education, from the TIF capture
* Provide aid for residents or businesses priced out of their own neighborhoods as a result of the development
* Require annual reports from the TIF district
* Cap the amount of assessed value that can be captured by the TIF district
A Vote For Public Confidence
There seems to be plans everywhere these days to seek public money for private developments – Graceland, Fairgrounds and others. That’s why Monday’s vote is important for more than just Highland Street.
With the vote, county commissioners have the chance to insist that there are standards and accountability put in place in the process, and along the way, assure the public that local government has an overall philosophy for strategically investing tax money to turn around Memphis neighborhoods, a goal that should be at the top of both city and county governments’ list of priorities.
