tax-incentives

 

 

 

 

 

 

 

 

 

Around 35 years ago, I was involved in creating the first matrix for the Memphis and Shelby County Industrial Development Board – the forerunner to the Economic Development Growth Engine (EDGE) – in an effort to bring more rationality and discipline to the awarding of Payment-In-Lieu-Of-Taxes (PILOTs).

Some years after the start of this century, I wrote a white paper for Shelby County Mayor A C Wharton Jr. that would lead to the creation of EDGE.  The paper called for bringing city-county economic development activities under a single umbrella to encourage a shared plan, better coordination, dependable communication, and smarter decision-making.

These days, looking back, these seem rather quaint notions.

Today, PILOTs have become entitlements, not incentives, and EDGE is spreading like kudzu.

It wasn’t supposed to be this way.

The Slope Gets Really Slippery

Wiped aside in recent years was EDGE’s founding mission to seal deals that attract new investments into Memphis and Shelby County.  Our concern that approving an 11-year PILOT worth $864,000 a year two years ago for a retail store in the form of IKEA could be a slippery slope unless EDGE slammed shut the door loudly on similar projects propelled by politics and special interests.

The slope has been more than slippery.  Today, EDGE has given tax freezes for apartments and a hotel, usurping authority of other public boards and venturing into areas never imagined when the city-county body was created.  The IKEA exception has now become the rule as EDGE becomes the agency-of-choice for people with influence in search of a system where they can tilt the board to get the biggest possible incentives.

We want to be clear that this is not meant as any criticism of the EDGE staff who are likely uncomfortable with some of what the agency is doing now, as the politically influential and campaigning vested interests treat EDGE more and more like an ATM that is more generous than the other city-county agencies vested with the power to issue incentives for projects like apartments and hotels.

All in all, however, it all is an increasingly cynical system, particularly when it can be seen as a transfer of wealth in a majority African American city to white business interests.

The Door Crack’d

We appreciate that these interests are so determined and passionate about getting as large of a tax freeze as possible.  After all, the value of the tax freezes often are their profits, and it is little wonder that the EDGE board and staff are pressured to go along to get along.

While we don’t take a “never a tax freeze” attitude, the frustration is understandable with about $70 million in city and county taxes being waived every year (EDGE is not the only agency empowered to approve PILOTs).  It is a frustration amplified by the glibness of the talking points justifying them and by the drumbeat to expand them without a meaningful fact-based rationale to do so.

We have expressed our concern over each of these expansions, most recently IKEA and apartment complexes.  It is clear from the uproar on social media that many are dismayed about the EDGE PILOT granted for a Midtown hotel as part of its Community Builder PILOT Program, whose stated purpose was “as a tool to help spur revitalization of distressed neighborhoods,” according to EDGE website, which added that the program was created because “we realized that our most important economic development incentive was virtually unusable for most inner city projects, where it was most needed.”

Since the IKEA PILOT cracked the door on EDGE exceptions to its policies, it seems that each special interest is charging in to get to the public’s cash register.

Modest Suggestions

While we have deep concerns about the way these incentives have become entitlements, we are equally concerned about how they obscure the reality that we lack a broadly-supported, aspirational economic development.  The PILOTs do nothing so much as give the appearance that we are making economic progress (most key data points paint a much different picture).

We have applauded EDGE for its transparency and for sponsoring The Memphis Economy website with University of Memphis Sparks Bureau of Business and Economic Research.  Too often, in our community, we define success by comparing where we are today to where we are 10 years ago rather than comparing ourselves to comparable cities to determine if we are making progress or simply running in place.

The Memphis Economy website puts Memphis’ economic performance into context, and it is gutsy of EDGE to provide candid, honest information that shows that our economic performance continues to lag, if not languish.

EDGE has been recognized by Good Jobs First, an anti-incentive research center, as one of the most transparent agencies of its kind in U.S.  It’s that track record that encourages us that perhaps, EDGE will post calculations that support the mantra from every applicant that “we can’t do this project without a PILOT.”  We are willing to be persuaded that they are right, but it’s hard to reach that conclusion without more information.

One other suggestion: if EDGE is to act as a bank for developers, it seems fair that Memphis and Shelby County taxpayers are given an equity position so if the project is successful, they will be too.

A Telling Message

At the time that the first matrix for PILOTs was created, the thinking was that tax freezes would be a stop-gap measure while the underlying barriers to greater prosperity and opportunity were addressed.  At the time, it was said that an unskilled workforce and structural problems were drags on economic progress, but they would be improved to the point by now that Memphis could attract jobs with few PILOTs.  And yet, all these decades later, we cite the same problems as justification for the overreliance on PILOTs, because we never made the quality of life investments and workforce issues were never consistently or effectively dealt with.  As a result, we have not substantially reduced our reliance on low-wage, low-skill jobs and continue to grant tax freezes for warehouses and distribution centers.

Also, back then, it was never expected that the rules would be changed to give companies another PILOT after their first one expired.  The so-called retention PILOT means that companies like International Paper may never pay their fair share of property taxes as a result of serial tax freezes.

It means that we are telling the rest of the country that the companies that know us best still don’t see enough value to support public services in their hometown.

It also means that just before the mantra, “we can’t do this project without a PILOT,” company after company repeat another mantra: “we are considering a move to Mississippi.”  In other words, PILOT presentations have largely become political theater in which everyone plays their part and repeats their lines while it is abundantly clear that many of the applicants have no meaningful prospects of moving out of Memphis.

Old School Thinking

While the odds against Memphis being chosen for the Amazon super-project, the process to submit a proposal could have value if it identifies the areas where we are lacking and develop a definitive plan to close the gap.  It is a central truth today that any city not treating quality of life assets as drivers of economic development is a city not realizing its economic potential.

It often feels that too many of our economic development thinking is built on “old economy” beliefs rather than the realities of the “new economy.”  The old economy is about being a place where it is cheapest to do business, but the new economy is about being a place rich in ideas with talent as the driver.

In the old economy, attracting companies was the priority, but in the new economy, attracting educated people is.  In the old economy, high-quality amenities were a barrier for cost-conscious businesses, but in the new economy, physical and cultural amenities are keys to attracting knowledge workers and young adults.

In the old economy, regions won if they possessed a fixed competitive advantage, but in the new, regions succeed if organizations and individuals have the ability to learn and adapt.  In the old economy, minority workers were sources for low-wage jobs, but in the new economy, African American entrepreneurs and businesses are the paths to prosperity.

In other words, we are often having an outdated conversation when it comes to economic development, even as the poverty rate remains roughly the same and 40,000 Shelby County Schools students live in families earning less than $10,000.

If EDGE and other agencies are to treat incentives as entitlements, they must at least set performance standards that include an increase in income, decreases in poverty, and an increase in higher-wage jobs.

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