Ben Franklin wrote that nothing is certain except death and taxes, but it’s rare for death to come to taxes or tax breaks.
Even unpopular taxes like the Shelby County Wheel Tax seem to have eternal life, while unpopular tax policies like those waiving taxes seem just as immortal.
The wheel tax this year entered its third decade. Created to avoid a 45 cent hike in property tax, it is testament to the “lesser of all evils” taxation choices for local government.
Voodoo Math
The poorer a Memphian is, the greater percentage of his income is paid in taxes, or translated into bureaucratese, it’s called regressivity, meaning that taxes are not based on a person’s ability to pay.
Combine that with the fact that local government’s lifeblood comes from regressive sources – property tax, sales tax, and wheel tax – and that Memphians pay the highest taxes in Tennessee – about one-third more than Nashville – and it leaves local elected officials with few options that don’t border on political suicide.
That’s why as Shelby County mayor, A C Wharton regularly went to Nashville with hat in hand to beg the Tennessee Legislature to give him new tax options that weren’t regressive. Each time, he left empty-handed, and with a Republican majority now in charge, it’s unimaginable that any will be approved now.
Mythology
In 2001, the year before Wharton took office, county government doubled the wheel tax for passenger vehicles to raise $14 million for schools, and the deep disdain for the tax spawned all kinds of fiction that persists today. There are people who swear the wheel tax was only to last one year, that it was to pay for all construction needs of the schools, that it wasn’t supposed to pay for The Med and schools, that only Shelby County has a wheel tax, and that it was surreptitiously passed by the board of commissioners.
None are true. The tax was passed in a public meeting, its uses were approved in a public vote of the board of commissioners, and the bonds being paid by the tax could not have been issued without a detailed accounting.
But, on one thing, opponents of the wheel tax were right. They said that although the tax was created to pay for specific bonds, it would never phase out, even when the bonds were paid off. Next year, the tax created to produce $14 million a year is budgeted to spin off $30 million.
Giving Away Taxes
Meanwhile, local government waived roughly $60 million in property taxes as enticements to attract businesses. This tax freezes program also began with pledges that it would only be used temporarily to jolt our economy, and over time, businesses would be weaned as our economic development strategies shifted from cheapness to quality.
Just the opposite happened, and in a 10-year period, Memphis and Shelby County approved 809 tax freezes, more than Knoxville, Nashville, and Chattanooga combined. In fact, Nashville approved only five. As the former director of the Nashville office of economic and community development said: “Incentives should incentivize. Once they become an entitlement, they’re no longer an incentive.”
The tax freeze program was so out of control earlier this decade that it was criticized even by pro-business Forbes magazine, which wrote: “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.”
The Addiction
The cry for change culminated in a report in 2005 by city and county governments’ own consultants, who strongly recommended a major overhaul of the tax freeze program. It took a year for government to approve changes, but the ink was barely dry before intense lobbying began to loosen things up again. It was only a matter of months that it was difficult to see any major change in the way tax freezes were handled and approved or any of the checks and balances needed in the program.
Then, two months ago, city and county government went a step further, approving tax waivers for large businesses who have been here 10 years, are investing $10 million, and retaining 100 jobs. It will be the first time property taxes will be given away without the promise of more jobs.
And it will be done in the face of researchers like David Birch who say that “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.”
This post was previously printed in the January issue as Memphis magazine‘s City Journal column.
I caution everyone not to look at tax abatements and other financial incentives in isolation or with a general sentiment. Generally, I agree with SC that these practices often encourage unnecessary corporate welfare and become entitlements rather than incentives. In some instances they even keep prices/rents artificially low and encourage the development of short-payback (disposable) properties.
However, I have been one of those people lobbying to keep some of these programs alive… primarily because it is difficult to find any way to make any form of substantive urban-revitalization project profitable (or even remotely viable) without an extreme palette of financial incentives. Despite any rational thought – land costs in the city are comparably high, construction costs for anything other than the flimsiest product are prohibitive and rents are relatively low for comparable urban product.
I think incentives should fit a community criteria. Is the project located where there is infrastructure, where there are employees or users, etc… basically, is the incentive for what you want or what we want?
I think incentives should be based on a fairly stringent and very public cost-benefit analysis. What is the public giving away? What will the public get in return? What does the development need? What will it provide in return? I do not know if it is still in use, but the CCRFC used to have a simple, one-page sheet that showed how much tax revenue would be diverted by a PILOT and for how long and then fairly accurately showed the increased tax revenue to the City and County when the project was fully on the tax rolls at the end of the incentive. Perhaps this is done for everything at all IDBs and we just don’t see it or talk about it. But these tools are necessary to make logical decisions about good incentives and to make the case for public/private partnerships.
POINT: I agree that many incentives encourage detrimental development at the worst and are an unnecessary gift at best. However, we are often tempted to throw the baby out with the bath water when we talk about incentives. If we do that without dramatically changing where developments are permitted, without reducing overall taxes for everyone and without a huge mindset shift regionally regarding City projects… then we may doom revitalization efforts.
John:
We’d be more reasonable about tax freezes if our economic development officials were trying to break their addiction to giving away taxes. We’d go along with them for awhile if they would give as much attention to creating the kind of quality city that reduces the reliance on paying people to love us. Interestingly, some of the most economically cities in the U.S. have the highest tax rates, so it’s not about the rate only, it’s about the value and quality produced by the rate.
We’re concerned that here a disproportionate portion of property taxes are shifted to residential taxpayers because of incentives given to pretty much anyone who can fill out the paperwork while the real drivers of the economy go it on their own.
We agree with you completely about the cost-benefit analysis. But it needs to be done by an independent person so the results have credibility. Too many times, these are done by firms who know future contracts depend on delivering the right results.
Downtown tax freezes are to us different than the IDB ones, because the freezes downtown essentially froze declining property values before they dropped even lower, but we question the length of these freezes.
Let’s start with what was probably the real purpose of the article … the property tax freezes. Unfortunately, most prospective supporters of your position probably never read that far because you had to throw out a few paragraphs of garbage that wasn’t really related to this central and important issue.
If this was a paper presented me for a grade based on the assignment of writing an argumentative paper opposing or supporting the current systems of property tax freezes as a method to encourage businesses to remain and provide jobs, I would give the paper a D+ at best. More likely I would just give it an F.
I digress … Let’s get back on topic. The short version is that I actually agree with you that the property tax freezes have gotten out of control and are probably doing more harm than good.
But that is about all agree with. I dispute David Birch’s assertion that “the cities growing fastest right now have the highest taxes, most expensive workers, most expensive land …” Without looking it up, I seem to remember that Las Vegas is one of the fastest growing cities and it certainly isn’t known for high taxes and overly expensive workers. I once lived in Texas which is the fastest growing state and it isn’t known for high taxes or expensive workers … BTW, both of those states don’t have an income tax either.
What tends to drive up land prices is demand. That is the result, not the cause, of a fast growing city. If high taxes were the cause of a city’s growth, then New York would be booming … but it isn’t.
And to talk about “expensive workers” is misleading as well. What sets the workers’ wages are skills/education and experience. It has nothing to do with location except sometimes one must pay a premium to get the needed workers to go to bad location (workers on the Alaskan oil rigs come to mind). Again, if high wages were the cause of, rather the result of, a fast-growing city, then NYC would be booming … but it isn’t.
So yes, let’s reform the property tax freezes but let’s do it because it makes sense. It all those words, you really never explained why it makes sense except for the one little quote from Forbes. Otherwise it was all political rhetoric.
Now to the garbage parts of the article that need to be addressed.
The only thing about the wheel tax being the “lesser of evils”, was that it was touted as being temporary until the schools were all air-conditioned. Now you can say all you want that this wasn’t the case but the collective memory of several tens (maybe hundreds?) of thousand taxpayers say differently. I argued vehemently with my parents that it wasn’t going to be used just for the schools and that it wouldn’t be temporary even if the wheel tax proponents said it would be … And proponents of the tax did say that! There is no getting around that. To deny that shows either ignorance or willful deceit.
And you know as well as I do that information didn’t flow as freely and as quickly back then as it does now. We didn’t have the internet and twitter postings about the meetings of the county commissioners. Sure, some public notice was probably published in the back pages of the newspaper. There was probably even a paragraph or two written about the changes in the paper. Don’t try to stand on, “The tax was passed in a public meeting, …”. That dog just doesn’t hunt.
First of all, it was passed by the voters and then renewed by the county commission. It was a classic bait and switch. Opponents of the wheel tax, like me, tried to point this out but we where hushed by the proponents who kept assuring the public that it was temporary. Well we all know that politicians don’t like temporary taxes. They used to actually go thru the motion of renewing the tax until they finally made it permanent.
Some bright lawyer should sue the county and the individual commissioners who voted to make it permanent for fraud based on fact that it was touted as temporary. It should have been put back up to the voters at that point rather than just letting the commissioners vote on it.
It was deceitful from the git-go. And it is just as deceitful and deluded to try to convince those of us who fought it and even those who voted for it that it was never touted as temporary.
Anybody who says that it was never put forth by the proponents as temporary, just loses credibility. Thousands upon thousands of voters who remember otherwise can’t all be wrong. We weren’t all hypnotized by aliens.
SCM – “The poorer a Memphian is, the greater percentage of his income is paid in taxes, or translated into bureaucratese, it’s called regressivity, meaning that taxes are not based on a person’s ability to pay.”
—Let me help you with that … it should be “translated into liberal bureaucratese”. It just another example of taking a simple word and twisting it mean something completely different. The word “regress” come from ORIGIN late Middle English (as a noun): from Latin regressus, from regredi ‘go back, return,’ from re- ‘back’+ gradi ‘walk’.
It simply means “to go back” or “return”. Now how did it come to be tortured into meaning taking a proportionally greater amount for taxes from those with lower incomes?
As long as I’m on this soapbox, liberals long ago hijacked the word “progressive” as if the liberal philosophy represents “progress”. To me, liberals should be called “regressives” since advocating greater gov’t control and intervention is returning the ordinary taxpayer to being nothing more than serfs to feed the elite.
Next, just the fact that Memphians pay about 1/3 more in taxes, according to you (and I don’t dispute it), than do Nashvillians (Is that what they call themselves?), should give you and everyone else pause. We pay a 30% premium over Nashville yet we do not have a corresponding 30% increase of livability. In fact, one could argue that we have less. But yet, you want more taxes? And you wonder why people are leaving Memphis? You wonder why the state gov’t rejects Wharton’s pleas for permission to create new and different taxes?
I really do love this city but I despise the last 15-20 years of city gov’t … that includes the city council and the school board. This city has lacked leadership for way too long … both in the mayor’s office and from the city council. I think the school board is hopeless and a way needs to be found to eliminate the Memphis school board.
Lately I’ve been encourage. The most recent city council membership shows signs of courage. I hope it continues. The newly approved term limits should help us from “regressing”!
More taxes aren’t the answer. Show us some leadership. Show us that the city can make good decisions. Show us that the money is being used wisely.
Midtowner:
You have a real gift – the ability to read our minds. The article’s real purpose was not about tax freezes. It was about what we wrote about, and since it was published in Memphis magazine, we’ll base our grade on that rather than your perceived clairvoyant powers.
Finally, a few facts. The wheel tax was NOT presented as temporary. Never, ever. Just pull the resolution, the bond issues, and the transcripts. You can even pull the brochure that was sent to taxpayers. It’s not there. Never was. It’s a myth like so many ones here.
Regressive is a widely accepted economic and public financing term. Sorry you aren’t familiar with it, and as a result, you mangle its meaning and the unfairness captured in our regressive tax system.
We’ve explained before why Nashville has a lower tax rate. We have the higher birth rates that go with the Delta culture and we pay about $200 million a year countywide as a result (and the higher birth rate is throughout the county) and in addition, Nashville has a better mix of property taxes and fees. Memphis has not created a balance between taxes and fees. It’s not as simple as comparing property tax rates because you have to compare all sources of revenues and per capita costs for government.
And finally, regressive tax systems most benefit the wealthy who get them passed, not liberal bureaucrats.
Thanks for commenting.