Non-Environmental Cost-Benefit News

Link: http://www.commercialappeal.com/mca/opinion/article/0,1426,MCA_536_3392754,00.html

Harry J. Skefos, who represents companies seeking PILOT incentives to locate or expand here, says the programs are especially necessary in Shelby County because of its high taxes compared with competing locations, and the high cost of training and keeping a workforce in the

According to Skefos The Payment in Lieu of Tax (PILOT) programs in Shelby County have been, and continue to be, essential for growing our local economy.

Programs that reduce, for a specified time, the property tax burden on new or expanding industry are a necessary incentive for two reasons: When compared with competing locations, Shelby County's taxes are simply too high; and the costs of training and keeping a workforce here compare unfavorably with other locations.

While the PILOT incentives are an essential tool of economic development, local government must also assure that such programs work as intended -- that applicants meet their obligations and that forgoing the taxes generates the intended benefits.

Job creation alone can be viewed as an adequate reason for such incentives, but Shelby County government has always held its PILOT program to a much higher standard.

Each application processed by the Memphis and Shelby County Industrial Development Board (IDB), the body that has awarded the vast majority of PILOT incentives here, includes computation of the cost/benefit ratio. (The application process used by other entities that award PILOT incentives may differ.)

The IDB's cost/benefit analysis amounts to a very conservative measure of how the amount of property tax that would be waived for a given project compares with the combination of the tax revenue that would be generated by new workers hired and the one-time payment of taxes associated with construction of the PILOT project.

Historically, PILOT projects that are approved have scored a cost/benefit ratio of .40:1.00 on average, which means that for every 40 cents of property taxes forgone, $1 in new tax revenues is generated for each year of the PILOT term.

The cost/benefit analysis is very conservative, as it doesn't take into account other tax revenues that usually result if a PILOT project materializes, such as: taxes paid on property not sheltered by the PILOT incentives; Tennessee franchise and excise taxes; taxes paid on property sheltered by the PILOT incentive after the PILOT lease term expires, and taxes generated from pre-existing jobs that a participating company is required to maintain.

Clearly, looking at tax collections alone, the PILOT program has been a real success for our community -- a conclusion that is only buttressed when one considers the tremendous job creation it has also enabled.

It is important to note that even when covered by a PILOT incentive, the applicant pays significant fees to the IDB to participate in the program, as well as a payment in lieu of tax each year that is equal to about 30 percent of what its county taxes would otherwise be.

The IDB's PILOT lease spells out each party's responsibilities and clearly protects the public's interest. It contains provisions that enable the IDB to monitor a participating company's performance; in cases where performance does not meet initial projections, the lease authorizes the IDB to reduce the PILOT incentive to the level earned by actual performance.

Recent changes now require a company participating in the PILOT program to reach and maintain 100 percent of its projected levels for job creation, wages and capital investment within two years of initiating its project. Failure to attain any of these goals by even the smallest amount will render a project in default.

Given these strict requirements and the realities of economic and business cycles, it is not surprising that some projects default on their IDB requirements. This year, out of more than 200 projects being monitored by the board, 30 were initially thought to be in default. After further review by the IDB's performance review committee, only 17 were determined to be in default. Of those, the IDB found that four cases did not warrant any reduction in PILOT incentives. The PILOT terms for 11 projects were reduced to bring the participating companies' incentives in line with actual performance. The remaining two cases are still under review.

During the past year, further attempts to restrict the PILOT program have been considered. They include a proposal to restrict PILOT incentives to projects that produce jobs paying wages above a certain minimum, without crediting the significant fringe benefits that may accompany a relatively modest base wage.

The problem with that approach is twofold. The application process already takes into account a company's pay scale, and those projects that offer lower-paying jobs will receive a smaller incentive. Also, our citizens often need these lower paying jobs -- which typically are entry level, lower skilled positions. Denying a PILOT incentive to companies that cannot meet a specified minimum wage will inevitably reduce the availability of such jobs.

More recently it has been suggested that companies should pay some "penalty" if they stop operating or move their operation out of Shelby County shortly after their PILOT terms expire to avoid a net loss of tax revenue.

The trouble with this approach is that its basis is false: On average, PILOT projects have resulted in much more tax revenue being generated for our community each year of the PILOT term than is lost or forgone.

Such a penalty provision would cause us to lose good projects when companies are not willing to accept such an obligation.

The only way such an approach would be fair would be for local government to revamp its cost/benefit calculations to take into account all of the tax benefits that flow from a PILOT project, and then to apply the penalty only to projects where the cost to the community exceeded the benefit.

In such cases the penalty would phase out over time as the company is credited with tax payments made following the PILOT term.

It is doubtful that more than 2 percent of the projects would fall into this category; hence, the negative impact of such a change would seem to outweigh any possible revenue gain for local government, although it might be a popular move for politicians who would prefer to shift the blame for our current revenue crisis.

The problem in Shelby County is not a lack of tax dollars, but rather that local government has for too long been spending monies that were not available, except through borrowing.

In 1997, property tax collections in Memphis and Shelby County totaled $485,543,620. By 2003, that amount had grown to $941,424,076, a 94 percent increase in only six years. (And the 2003 figure does not include tax collections from new construction, Memphis's annexation of parts of southeast Shelby County and revenues from the Central Business Improvement District and the PILOT programs.)

High taxes will encourage people and businesses to leave Shelby County, causing property values -- our tax base -- to fall and leaving fewer of us here to provide the same level of tax revenues for local government by paying an ever-increasing tax rate.

The only way to reverse this negative spiral is to limit increases in government spending, to pay off local government debt, and to begin to lower tax rates so that economic development is spurred on -- even without consideration of a PILOT incentive.

In the meantime, the PILOT programs in Shelby County provide an essential economic development tool that can keep economic development moving forward until local government can get its fiscal house in order.

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Harry J. Skefos is an attorney with Martin, Tate, Morrow & Marston, P.C., in Memphis who represents companies applying for PILOT incentives.