So why do multi-national corporations taking in tens of billions of dollars a year in revenues demand incentives that shift their tax burdens over to homeowners? Because they can.
That’s being proven out yet again as International Paper asks for $56.9 million in tax breaks over the next 15 years.
Just think about it this way: here’s a company that knows us as only a Fortune 500 corporation does, and they are saying in essence: “We still don’t place any value in the future of this city and county and we certainly don’t want to contribute to better schools, safer streets, and better quality of life.” Instead, IP wants the EDGE board to waive $3.8 million a year in property taxes for 15 years. This means that the cost of all public services needed by this corporation will be paid by homeowners.
In return for this $56.9 million in tax breaks, IP will add 101 new jobs, or put another way, each new job is costing Memphis and Shelby County $563,366. We hear all the rhetoric about retaining the jobs that are here now, but real cities and counties measure the cost of incentives in the cost per new job. It’s hard to find a place that pays more per job than is paid here.
A few weeks ago, The Commercial Appeal editorialized about the Arkansas incentives for a new steel minimill in Osceola: “There are surely some folks who view this as a $125 million economic development gamble. And that raises the question of how much state and local governments should be willing to invest to reel in an industry and its good-paying jobs.” It’s a seminal question and the one that goes unanswered here year after year.
We do understand that IP’s request is better than its first one – 30 year tax waivers for all the real estate the company owns and leases in Memphis and Shelby County – but still, it has become the poster child for a tax incentives program that has run amok and today has become nothing but a corporate entitlement. About the previous request, Shelby County Board of Commissioners Chairman Mike Ritz said it could cast IP in a negative light.”
Things are only marginally better. IP has been here for 27 years. Is there ever a point when a huge corporation like IP values the city they live in enough to help support it, particularly now when schools are begging for more money to create a “world-class educational system.” After all, the $3.8 million in taxes that they will save each year amounts to what they normally make in net income in a day.
The EDGE application points out that IP made $700,000 in grants in Memphis and $300,000 in sponsorships and in-kind donations, and every one of us should be grateful for this, but all of us who care about this city and county are contributing money to good causes and volunteering for others, and yet, there is no place where we can go to ask for a break on our taxes for being good citizens.
An EDGE report claims that IP will generate $225 million in new tax revenue, and simply put, that feels like fuzzy math and feels like one of those economic impact studies that have become standard around here by exaggerating the economic benefits in the extreme.
Whether IP gets this PILOT request approved or not, one thing is certain: there is a growing chorus of people who are concerned about policies of local government that waive almost $100 million in taxes at a time when public services are deteriorating, when we have the highest cumulative tax burden in Tennessee, and when ordinary taxpayers are essentially being asked to fill the gap left by corporate tax breaks. In its way, IP has become instructive in demonstrating how we have become addicted to paying companies to love us and doing it in a volume that is unheard of in any other part of the state (and the nation, for that matter).
Here’s a November 12, 2012, post we wrote on this subject:
It’s hard to get too irritated with International Paper for asking for the citizens of Memphis and Shelby County to pay their taxes. After all, we’ve brought this audacious request on ourselves.
The international corporation with more than $26 billion in revenues is merely reacting to the message our city and county communicate about our low self-esteem, self-confidence, and self-worth as mirrored in payment-in-lieu-of taxes policies that are the most unbalanced in the nation.
Our negative self-perception is a thread that runs through all of our economic development “systems,” whether it is the “give away the store” approach toward tax waivers for multi-national corporations or the Airport Authority “climbing into bed” with Delta Air Lines and leading us to the current crisis at Memphis International Airport, where we pay more than $600 million than average U.S. cities for airfares and where Delta Airlines has no contractual obligation as it leaves to repay us for the costly improvements made for it.
The request by International Paper for an unprecedented 30-year tax waiver is more than anything incredibly demoralizing.
For 26 years, IP has been a highly valued part of our community, and for six years, we’ve been even prouder for its headquarters to be located here. And yet, after that period of time, we are being told that they don’t think enough of us as a city, as a community, and as workers that they would move somewhere else unless we give them a tax break that’s the equivalent of what they get in revenues every six hours.
A Dangerous New Precedent
It’s the sheer scope of IP’s request that has evoked the widespread negative reactions. It would be one thing if it was asking for an unprecedented 30-year tax freeze for a single new building, even if it’s only for 100 new employees, but remarkably, it’s asking for the $13.5 million that it pays now in property taxes to be zeroed out, effectively shifting its tax obligations to the public.
It’s impossible for even the most ardent advocates of tax freezes to argue for IP’s request. The spiel in defense of the PILOTs has always been that it’s not really costing anything in taxes because the jobs wouldn’t exist without the tax freeze. (More on this later.) This time, however, the company is in fact turning that argument on its head, instead asking for existing taxes to be waived.
In other words, at the time when Shelby County Government is coping with the challenge of funding new countywide school district and City of Memphis is facing serious budgetary challenges, one of our Fortune 500 companies wants to remove $13.5 million in tax revenues from local government.
That means that the property taxes that IP wants to quit paying is the equivalent of approximately 6 cents on the city tax rate and also about 5 cents on the county tax rate.
We’ve Lost Our Balance
The lawyer hired by IP to handle this PILOT request is well-known in the halls of government for creating these kinds of outrageous demands and operating on the theory that he can up the ante and paint elected officials in the corner so they either have to approve the request or appear to be deal killers.
It’s a cynical approach but experience has taught the lawyer that it works. That said, it’s highly unlikely to work this time, because his request for a 30 year forgiving of all city and county taxes crystallizes the extent that our business incentives have gone awry. For the first time, elected officials are coalescing around a position that the IP request is a bridge too far and that IP has ultimately put Memphis in a no-win position.
It’s not that those of us here are unilaterally opposed to all tax waivers, but business incentives are like life: it’s all about finding the right balance. Our community has lost ours when it comes to our general economic development policies.
We now have the municipal equivalent of the “loosest slots” in the country, and every time that we have had the opportunity to bring more reasonableness into the PILOT process, we have done just the opposite. Even when armed with a 97-page report issued in December 1, 2005, by consultants hired by them, city and county governments – lobbied hard by the Greater Memphis Chamber – started weakening the recommendations before the ink had dried.
Serious Incentive Policy
The radical thinking provided by city/county consultants, URS Corporation and NexGen Advisors, was that a “but for” approach should be part of the PILOT process, meaning that tax waivers should only be given when the project would not happen “but for” them. 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 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.”
Remember the context of the times when the report was written. It was at a time when even pro-business 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.”
It also came in 2005 after a decade when local agencies handed out seven times more tax freezes than all the other urban counties in Tennessee combined, and rather than ask why, we ended up asked how we could do more.
It was sad enough that Memphis and Shelby County Governments abandoned the common sense and reasonable recommendations of the consultants but they instead embarked on a path that opened up the floodgates even more. Policies were passed that allowed every existing company to threaten to move somewhere else – the obligatory Mississippi threat – in order to get a PILOT, and cost-benefit analyses that were manufactured for each request that regularly defied logic and mathematics.
Real Negotiations
Forget the talking points about competing with Mississippi, about workforce issues, and about the price of competing for jobs. What is lacking is any independent research or study to back up the claims. What is glaring today is the disconnect between the positive rhetoric about our momentum and our success and economic development policies anchored in the assumption that we have to pay companies to like us.
The lack of attention to the factors that drive economic growth today creates a cynical reinforcing cycle. Without these drivers of growth, we justify more tax freezes because our labor force isn’t good enough, smart enough, or skilled enough. We’ve used this justification for 20 years, a period of time in which we never mounted the kind of serious workforce development plan that we need.
Here’s the thing: you aren’t really negotiating if you’re not willing to walk away from the deal. For too many years, we haven’t really been negotiating, but one thing is clear about the IP request: most people are willing to walk away from the deal.
Unfortunately, International Paper’s lack of belief in the future of Memphis is one that has been shared by almost all big business. Firestone left. RCA Television left. Schlitz and Stroh’s left. Harvester left. Holiday Inns was FOUNDED here and left. Downtowner Inns left. Hilton left. Harrahs left. When a couple of companies give up on Memphis and leave, you maybe can chalk it up to those companies. When almost ALL your large corporations are leaving or threatening to, and can only be convinced to stay with “bribes”, something isn’t wrong with the companies, something is wrong with Memphis. Our city has always had a chip on its shoulder, has always been defensive, has always made excuses. It is time we recognize the truth. For whatever reason, Memphis has become a terrible place to live. A place that companies hate to do business. A place that conventions choose to leave. A place that our own born-and-raised children cannot wait to get out of. The statistics show the constant loss of professionals, of the educated. Until these factors are confronted honestly, without excuses, our local government will continue to have to fork over the incentive monies and tax breaks to preserve what few jobs still remain. I’m not hopeful, because Memphis leaders will likely consider this to be American industry and the rest of the world “hating on them” rather than acknowledging what a dismal place we have become.
It is dismal. I’m leaving, and you should too, while you can still sell your house.
Where is the publicly available data evaluating PILOTs? What about the transparency of EDGE’s economic impact study (in the case of IP’s application, done by Dr. Sharon Younger), that do not appear to be available online?
Public policy suggestion. With an application as large as IP’s, why doesn’t EDGE make an offer IP can’t refuse, to induce IP to make concessions the city and county would prefer. For example, give IP a large enough sum to move downtown, and develop an urban corporate campus location coveted by the nation’s top professionals, and that will have lasting value beyond that of a suburban tower?
Nobody can induce IP to move downtown. I’m frankly surprised they were able to induce IP to even stay in Memphis at all with the incentives. Fred Smith has told the Memphis Flyer in the past that Fed Ex will likely leave Memphis after his retirement. Our leadership is doing nothing to prevent the loss of these jobs other than giving tax breaks. They are not addressing the crime issues. Their “solution” to the education issue is to pass it on the county and the state. They likely do not even have a plan for coping with the loss of Fed Ex should it occur. Memphis has been mismanaged to the point that it is basically no longer viable.
Shaw- would you please cite the specific Flyer article with said information from Fred Smith?
The article is from 10/13/2010: I asked Smith if failure of the consolidation referendum would influence FedEx’s thinking down the road. Even if consolidation were to pass, it would not be implemented until 2014.
“We will have to wait and see,” he said. “One of the things that concerns us a lot as a very large taxpayer is the redundant expenses and the loss of the population base due to out-migration. We think that the government leaders have to basically accomplish what the charter commission is trying to accomplish. If the voters don’t want to consolidate the governments, they have to consolidate the functions to get to the same economic costs. I think that would be Plan B. Mayor Wharton and Mayor Luttrell have to get together and say, ‘We cannot run this community with a noncompetitive cost structure.'”
Just as there was a call to separate “church and state” at our nation’s birth, it is becoming increasingly clear there must be a mandate to separate “business and state” for our nation’s future.
Urbanut, Memphis is a classic example of what happens when “state” is separated from “business.” Business leaves, state has no funds with which to operate, and a city (or a nation) collapses.
John Shaw, the point about moving downtown is that cities are in a race to increase walkability and livability. (If you disagree, not sure this is a conversation worth having – you’d be about a zillion studies/books behind and living in a silo full of information from 1995). If major employers are going to gouge the taxpayer and continue to erode the municipal operating budget, the onus to be more walkable and livable is that much more urgent (one of the biggest reasons for being more walkable is that it’s also the only way to reclaim black municipal balance sheets). So, the only sensible string to attach to PILOTS is to mandate walkability. Practically, I’m thinking either try to induce the PILOT recipient to develop/expand in a walkable urban manner (not possible at their current location without master redeveloping a transit-oriented development site, which wouldn’t make much sense) or existing neighborhood (i.e., downtown core), or tie the ALLEGED revenues generated from the PILOT to future walkable development incentives (induce development patters than the city needs in order to survive). So, I suggested, rather than giving IP the minimum of what they’re extorting – I mean, asking – for, give them enough to induce them to do something that’s in the city’s best interests (obviously not so much that they it doesn’t benefit the city in the long run).
John Shaw – http://www.raleighpublicrecord.org/news/2013/02/11/raleigh-planners-look-to-roi-for-future-growth/
It is about a balance, and the balance has long since been lost here when almost $100 million in taxes are waived that would otherwise support vital public services. It creates an interesting dichotomy. Business leaders regularly criticize the ability of government to operate wisely and then they turn to government to subsidize their business. Government needs to be supportive and create the environment for business success. It is not to set up an entitlement system like the one that exists here today.