In our last post, we wrote about Memphis myths, and we can’t think of a public policy that is shrouded in more mythology than the PILOT (payment-in-lieu-taxes) program.

There are all kinds of justifications given by supporters of the program for waiving almost $100 million in city and county property taxes a year, and it is striking how few of them are rooted in the facts.  Some of the favorite myths are that we have to give away taxes because our workforce is so poor, we have to give away taxes because our property tax rate is onerous to companies, we have to give away taxes because we have two governments that complicate business recruitment, and we have to give away money because basic city services aren’t good enough to attract jobs on their own merits.

Even more perplexing are the assumptions on which these opinions are based:

* Large companies will never pay city and county taxes, and taxpayers should be willing to accept this without complaint as a fact of life.

* Memphis is never good enough for companies who know us best to contribute their taxes to support vital government services.

* There is no harm caused by our overreliance on tax waivers as public policy.

* While there is the common complaint that government does not operate like a business, corporate clients who signed PILOT contracts with the promise that they would one day pay their taxes can ignore them and government should acquiesce.

Cause and Effect

Here’s the thing: when the PILOT program was first created, it was to be temporary stopgap program to give Memphis and Shelby County a trump card in business recruitment, but it was expected in future years to become more and more selective, strategic, and infrequent.  Much has changed since the modern PILOT program was created approximately 35 years ago, namely the underlying dynamics of the economy.  In this way, the PILOT program’s roots run deep into old school economic development and it does little to respond to the need to support, encourage, and incentivize entrepreneurs who drive today’s economy.

Oddly, the tax freeze program is accepted readily by people who otherwise express concern about local government’s “high property tax rates,” which are of course higher because some major national and multi-national companies earning billions of dollars in revenue a year are shifting their tax burdens onto homeowners and small businesses.

Frequently, cause and effect are ignored in the discussion of PILOTs, such as the fact that unemployment is climbing and per capita incomes are lethargic despite tax freezes that are now renewed with merely a whispered mention of North Mississippi for a possible relocation.  And yet, there is a clear cause and effect in more and more PILOTs and higher and higher tax rates.

It is also curious how complaints about our workforce and public services are disconnected from the reality that workforce training and public services are being starved out of much-needed revenues waived in tax freezes or that tax rates could be reduced by at least 10 percent with a more serious negotiation of the PILOTs.  Meanwhile, the same companies who get a pass on paying taxes here have offices and branches in cities with higher tax burdens for corporations.  Meanwhile, complaints about two layers of government ignore the fact that only a small number of major cities are consolidated, and the vast majority of them, just like Memphis, have both city and county governments.

The Privileged Class

It seems like an appropriate time for local leaders to revisit the conclusions of researchers at George Mason University who issued a comprehensive analysis of the PILOT program in 2006, pointing out the myths about the effectiveness of tax freezes and the fallacies in the philosophy and practice of the PILOT program..

Because the PILOTs reduce property taxes on a select few and shift them to the unselect many, there are better ways to improve Memphis’ prospects for growth, according to the report authors.  “Economic growth creates jobs; jobs do not create growth. Thus, job creation in itself is not an advisable policy end,” they wrote.

More than anything, the 43-page report calls out the fatal flaw in the program: that it hands out tax freezes whether the company really needs it or not.

It’s called the “but for” issue – meaning that the company would not move to Memphis or expand operations “but for” the tax incentive.  Rather, policies assume “that none of these companies would have located in Memphis without the program and that the PILOT did not induce some of these companies to ‘crowd out’ existing investment or investment that would have occurred in absence of these PILOTs.  Moreover, the economic impact estimates rest on the use of multipliers which are high dubious,” the authors of the report wrote.

Corporate Entitlements

“In addition, the report does not address the Tennessee Advisory Commission’s point that the cost-benefit analysis should include a variety of costs in addition to the forgone tax revenue.  The IDB (now folded into the EDGE organization) adopted a similarly flawed model to estimate the costs and benefits of individual applicants.  As a result, the cost-benefit analysis used in PILOT evaluations is of little practical use.”

As the study points out, the Memphis economy has struggled despite the professed benefits of the PILOT program.  “Though most local stakeholders praise the PILOT program because of its ability to create jobs, some economic theorists justify PILOT-style tax incentive programs based on the fact that market mechanisms are insufficient to promote optimal economic development.  This line of thinking discounts what entrepreneurs do and prizes local governments’ ability to engage in activities they are not equipped to do well.

“Governments can best foster economic growth by focusing on the quality of the institutions in which entrepreneurs operate.  What matters for economic growth is that private individuals and businesses can bet on the future and reap the gains (or suffer the losses) of their bets when they are successful (unsuccessful).

“In the end, local reform in this area is difficult, as political and economic circumstances strongly favor the status quo.  Politicians, even those who believe that the programs do not work, are participating in a contest to see who can be perceived as trying to recruit the most jobs.  Any politician who declines to participate in the job creation game risks suffering politically.”

Wanted: Political Courage

The political reality is obvious, because some of our community’s best elected officials treat PILOTs as the third rail of government policy.  Perhaps, it is the corporate contributions, it is sincere belief, or it is effective lobbying by business, but the result is the same.  Regular Memphians who own homes and small businesses are paying a disproportionate share of the local tax burden simply because of a faulty tax policy that gives corporations a free ride.

That said, we are grateful to the staff of EDGE.  Despite conventional wisdom to the contrary, the new organization has created more transparency than most of us ever thought possible.  In this way, the staff has shown an interest in public opinion and in communicating with citizens.

Perhaps, now that staff has installed new reporting procedures and set up new evaluative processes, they can turn their attention to better, more refined policies that do not treat tax freezes as an entitlement for corporations.  Hope springs eternal, but there’s no serious reason why the staff and the board cannot get this done in a businesslike way.

With the state comptroller’s expressed concern about the impact of PILOTs on City of Memphis budgets and cautionary comments by a state economic development official, there is no time like the present.