Facing a budget shortfall of about $17 million, Memphis City Council would be guilty of neglect of duty if it didn’t take a close look at the roughly $25 million in city taxes waived by city-county boards like the Industrial Development Board.
After all, if we were a casino, we’d have a billboard proclaiming that we have the “loosest slots in the Southeast.”
As City Councilman Jim Strickland explained it at Tuesday’s Council meeting as he recommended the creation of a six-person committee to evaluate the Payment-in-lieu-of-taxes (PILOT) program: “I think most reasonable people agree that we have to use incentives, but are we really getting our money’s worth? We may be. Or we could find some changes need to be made, whether in the amount of incentives we’re offering or the type of incentives.”
The first item on the City Council agenda should be to hire an independent consultant to review current procedures and the cost-benefit analyses now produced by people with vested interests in the current tax freeze policies. As we’ve written for several years, the current system lacks the customary checks and balances that are customary in the public sector.
Too Big (or Small) to Fail
In essence, the economic development officials negotiating the tax freezes are the same people paying for the economic impact statements that relentlessly and dependably show that every tax freeze is the smartest possible decision for city and county governments. As part of this evaluation, City Council should select comparable and peer cities on which to compare incentives.
There is no one in this region that is more hard-working than our economic development officials, and they should be commended for their diligence and their labors on our behalf, but the cost-benefit analyses that have been presented to justify tax waivers over the years have at times defied belief and have on occasion counted things as economic impact that weren’t real injections of new money into the economy.
Most telling of all is that we can’t remember a single time when the equation invented to evaluate these tax waiver requests concluded that one wasn’t justified. If there have been some, we suspect you can count them on one hand. You’ll need all your fingers and the fingers of about 13 friends to count all the tax waivers that have been approved.
Q’s, Now for the A’s
The second item on the City Council agenda should be to revisit the 2006 report prepared by the last consultant who was paid to conduct a comprehensive review of the processes for granting waivers of city and county taxes. The recommendations in that report were sound, and a few of them were enacted, but before the ink was dry on the resolution adopting some of the recommendations, the beneficiaries of the tax freezes were lobbying against many suggestions. Incredibly, rather than reining in tax freezes, city and county governments loosened up their uses even more.
At the time, former City Councilman Tom Marshall called for immediate adoption of all the report’s recommendations, but it was not passed and the best chance for serious reform of our PILOT program was missed. Memphis and Shelby County continue to approve more tax freezes than the other major counties in Tennessee combined,
The third item on the City Council agenda should be to compile questions that should be answered by those who reliably call for the tax freezes and for their independent consultant to address. Here are some of ours:
When the tax freezes were created, it was said that they would be a stop-gap policy used until Memphis and Shelby County could recruit jobs on the basis of quality rather than cheapness. When and how do we get to that point?
Why do Memphis and Shelby County need to dole out tax waivers to distribution companies who should recognize the benefits of being adjacent and accessible to FedEx? At what point can we stop offering incentives for these low-wage jobs?
What are major distribution operations in our community doing to avoid providing a living wage and benefits envisioned by local elected officials? How pervasive is the policy of hiring temporary workers in warehouse and distribution facilities and releasing them to prevent the legal requirements of fulltime employees?
What do the trend lines look like for the amount of tax waivers given each year and the number of jobs created?
Doesn’t the new policy of giving waivers for people to keep jobs in Memphis and Shelby County make the threats of moving them to Mississippi now pro forma?
What harm does it really do to Memphis and Shelby County for businesses like McKesson Pharmaceuticals to locate just over the county line in DeSoto County? Surely the people from Memphis and Shelby County who drove to work there when it was in Southeast Shelby County can drive a few more miles to the present location. Why not let DeSoto County bear some of the cost of the regional economy for a change?
Why are we so obsessed with North Mississippi any way since about 75% of the jobs and 80% of the earnings are here in Shelby County? We say that Nissan located to Nashville when it’s actually in Franklin/Cool Springs, and we say Dell located to Nashville when it’s Lebanon. Hernando is Memphis in the eyes of everyone but us. How do we walk the walk of regionalism instead of just talking the talk?
Even More Q’s
If a company is not viable enough to pay decent salaries and provide basic benefits, why is it in the public interest of Memphis and Shelby County taxpayers to subsidize them in the first place? Are these really the companies on which we want to rest the future of our economy?
What is our strategy for attracting good jobs by leveraging existing high-quality assets by enlightened leadership with a visionary ownership of opportunity? What do we do to shift our focus to high-value, nonreplicable global class assets?
Often our economic development strategies seem to be akin to fishing downstream and whatever comes by, we fight mightily to pull ashore. What could we do to move upstream where we can compete for the really big fish?
What can we do to compete with other regions of the U.S. rather than compete within our region?
Since the Industrial Development Board has been delegated the power to waive taxes by the City Council which could have retained the power, does the Council have priorities that should be incorporated into the current criteria for a tax freeze? How does the IDB align its objectives with the city of choice objectives of City of Memphis?
The Last Q’s
Economic development officials said that tax freeze policies had to be loosened up because of the recession. Now that the recession has passed, can the policies be tightened up somewhat?
The former head of Nashville’s economic development office said, “Incentives should incentivize. Once it becomes an entitlement, it’s no longer an incentive.” Haven’t our tax waivers become an entitlement?
What is the average cost of public services to these companies that have to be shifted to property owners because the companies pay no taxes?
If these tax freezes are such good deals for taxpayers, what about posting the PILOT applications and approvals in an easy-to-understand report on the Internet?
Our Six Principles
We made these suggestions six years ago when asked what our principles would be for economic development if we were in charge:
#1 – Quit selling Memphis on the cheap.
#2 – Exhibit loyalty to Memphis citizens, not just blind loyalty to new businesses.
#3 – Define success by people, not buildings and real estate.
#4 – Abandon “commodity economic development.”
#5 – Set national standards in economic development.
#6 – Don’t wait for the game to come to us.
Here’s the main thing about PILOTs: the public might be more willing to tolerate them if there was even a whisper that economic development officials are trying to create a context where success is defined by how few tax freezes are handed out, not by how many.
Old School ED
We believe that the most successful cities in the knowledge economy are selling themselves on the basis of quality. We continue to sell Memphis on the cheap. For seven years on this blog, we’ve been asking if there is a plan to move us from the cheap category to the quality category and if there is a plan to reduce our extreme overreliance on tax freezes.
We asked it when we were the first to report that Memphis and Shelby County gives away more tax freezes than all the other large urban counties combined. We asked it when the city-county’s own consultants reported that the IDB procedures were badly flawed and that reform of the program was temporary at best. We asked it when professors and Forbes criticized our tax freeze program as counterproductive and illogical. We’re still asking it.
We’ve heard a lot of comparisons between our community and Nashville, and here’s another one: 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 college-educated 25-34 year olds and skilled jobs. It identified key public investments to make this happen, and because of it, today, Nashville is fighting Charlotte as the South’s #2 city (behind Atlanta).
Memphis took another road. It was rooted in “old school” economic development that sold our city on the basis of cheap land and cheap labor. 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 a shift in the tax burden and increases in taxes that choke off the small businesses and the entrepreneurs who create most of the new jobs in the first place.
Corporate Tax Dodging
Greg LeRoy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation, 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 have 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…
“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.”