Last post: Jobs and Investment Numbers Alone Don’t Justify PILOTs
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The dirty little secret about PILOTs is that every time a tax break is approved, about one-third of the county taxes being given away are taken from schools.
Here’s the background:
When the PILOT program was established in 1988, the tax break waived 100% of property taxes for a maximum of five years. The thinking at the time was that the incentive program would only be needed for a short period of time because our community’s competitive advantage would grow strong enough that incentives wouldn’t be needed except in extraordinary instances.
Special interests, Chamber of Commerce, and political pressure made five years a relic of the past by 1996 when the program was amended to create maximum terms of 15 years. Longer periods – like the recent 20-year tax break for the Falls Building downtown and a second 20-year PILOT in 2019 to follow a previous 20-year PILOT for FedEx Technology Center in Collierville – were to require city council and county board of commissioners’ approval, according to the amendment at the time.
About 30 years ago, PILOTs’ tax waivers were reduced from 100% of property taxes to 75% with the intent that the revenues from the 25 percent would go to schools. Actually, schools were still shortchanged because 60 percent — not 25 percent — of the county’s property taxes are spent on education. Of course, City of Memphis doesn’t fund schools any more so its 25% portion is apparently deposited in the general fund.
A reasonable estimate of the amount of revenues that schools lose from PILOTs every 10 years is about $150-180 million.
Education Is Economic Development
While every dollar given to a company or a developer in an unnecessary or excessive PILOT is a dollar that can’t be spent on education, there is little talk about “making schools whole” in tax breaks.
The Industrial Development Boards in Hamilton County subtracts school funding from tax incentives it approves so education is never short changed when companies are being recruited to Chattanooga. It’s not alone. Other cities have taken actions to protect school funding.
The inequity of giving away school funding by all nine PILOT-approving boards, particularly EDGE, Downtown Memphis Commission, Memphis Health, Educational and Housing Facilities Board, and even by IDBs in the suburban towns – without consultation, much less a vote, with the elected school boards should be paramount on the agendas of the state takeover board and Memphis-Shelby County School Board.
Although tax breaks are ubiquitous across the U.S., other places are more surgical in their applications by using inclusive incentive scorecards and equity indicators. Pittsburgh and Indianapolis report the tools have made it clearer to evaluate tax breaks in light of tax policies and fiscal choices. Both require a wage of $18 an hour (here, the Economic Development Growth Engine — EDGE — requires $15 an hour). Indianapolis also requires companies to invest 5 percent of their tax savings into transit, workforce training, or childcare for employees.
Tale of the Tape
As of September 30, the amount of Shelby County taxes being waived in a year is $44,019,917.
The following is the breakdown of county taxes waived by each PILOT-granting agency (remember these are county taxes only – for tax breaks in Memphis, it’s safe to assume the waived city taxes are roughly the same as the countyu):
$20,442,827 – EDGE
$ 9,651,856 – Downtown Memphis Commission
$ 163,533 – Industrial Development Board of Arlington
$ 220,000 — Industrial Development Board of Bartlett
$ 2,817,003 — Industrial Development Board of Collierville
$ 488,310 — Industrial Development Board Germantown
$ 261,270 — Industrial Development Board of Millington
$ 8,594,407 — Memphis Health and Education Board
$ 937,275 — Shelby County Health and Education Board
Relevant Takeaways
The takeaways from a recent webinar hosted by the State Economic Development Network should be especially relevant here:
- The most effective economic development incentives combine business incentives with investments that strengthen a location’s underlying competitiveness.
- The specific type of incentive is less important than how the pieces come together to create meaningful economic development opportunities for businesses, people and places.
- Elected officials and residents want – and deserve – the full picture. They need to understand what an incentivized project is delivering to and costing a community, not just the number of jobs relative to the size of the incentive. They need to understand the ancillary costs of a project, like the costs of roads and other infrastructure that will become a cost to local government.
- Data center policy is putting these principles to the test. The emerging emphasis on guardrails rather than simple yes-or-no decisions reflects the complexity of the choices facing policymakers.
- Regular evaluation is essential. It allows economic development leaders and policymakers to understand incentive costs, benefits, and ROI, while also identifying ways to improve program effectiveness.
- Communication is part of a successful incentive policy. Local agencies need to explain not just what taxes they have waived and what the companies promised, but how the investment contributes to the broader economic and community goals.
As the maxim goes: every system is perfectly designed to produce the specific results that it does. The local PILOT system, to be a leading program of its kind, means it should carefully consider better ways for the tax breaks to achieve more of our local policy objectives and to treat tax breaks as the exception and not the rule.
