Tax breaks for corporations

Mayor Harris Goes Hard on Local Tax Breaks

Shelby County Mayor Lee Harris took aim at city and county tax breaks last week and pulled no punches, calling components of it “made up” and “laughable.”

Harris spoke candidly about the issue during a panel convened last week by The Beacon Center, a Nashville-based free-market think tank. The panel included Mark Cunningham, the center’s vice president of strategy and communications, and was moderated by Otis Sanford, Memphis journalism professor, columnist, and television commentator.

The conversation followed an online viewing of a documentary called “Corporate Welfare: Where’s the Outrage?” (below). The film features The $9.5 million tax break given by Memphis and Shelby County in 2015 to lure Swedish retailer Ikea to Germantown Parkway. (The company returned some of the money in 2019 after failing to meet job numbers set out in the original agreement.)

Harris has been publicly against tax breaks for some time and said (as he did again last week) that investing in infrastructure like schools, roads, and law enforcement would do more to lure companies to Shelby County.

Here are some of Harris’ hardest-hitting quotes from Thursday’s discussion:

• “I am generally against tax breaks for corporations. One of the main reasons is because it sets up government to pick winners and losers, to decide which companies should get a government subsidy and which companies should not.”

It sets up government to pick winners and losers.

“Those kinds of things should be determined by the market, by what consumers demand, and by entrepreneurship, and what kinds of companies are good at their craft, not by government.

“This idea that government somehow steers a company one way or another doesn’t sound believable to me.”

On the prestige of having an Ikea and the competitive pressure to woo the company here:

• “This stuff is just made up from the start of it to the end of it.”

This stuff is just made up from the start of it to the end of it.

“A few weeks after [Ikea] got the millions in tax breaks from Memphis and Shelby County, they announced that we’re going to also open something in Nashville and they continue to open stores all across the country.

“It’s just made up stuff. It’s a made-up theory about how the economy works. It’s a made-up theory about ‘if we do this, they’ll go somewhere.’

“Businesses want to achieve profitability. That is what drives their decision-making. Government’s getting in the middle of it actually hurts and hinders all of us. It doesn’t help them to make their businesses better. It hurts us all.”

• “That’s what I’d say about the repetitional effects: They just weren’t there. [Ikea was] announcing these openings all over the place. So, those things are just made up to get the tax breaks and they tell you what’s really happening.”

On why politicians support tax breaks:

• “I think it’s just the idea among politicians is still — that for the last 50 years or more — jobs has been such a high-polling issue. So, if you want to attach yourself to that high-polling issue, this is one way to attach yourself to it.”

You just got to understand that the businesses create jobs, not government elected officials.

“But … if you go back to the fundamentals of the economy, government officials don’t create jobs except jobs in government, right? You just got to understand that the businesses create jobs, not government elected officials. That just doesn’t really happen. They come, but it doesn’t really work that way.”

On why tax breaks continue:

• “The system [for tax breaks] already exists. The consultants are already out there.

“[Consultants] produce the reports, which are generally not worth a lot. They come with these packages to say, ‘Hey, we can get you a little extra.’

“So, from the business perspective, they start to feel like suckers. If they say, ‘No, no, no, I’m all about the free markets.’ They’re almost boxed into saying, ‘Okay, you’ve got a package of incentives and subsidies that you can bring from a municipality or from a state. I’ll take it.’”

So, from the business perspective, they start to feel like suckers.

“So, the businesses are boxed in, too, even if they agree that it would be better to not have this practice at all.”

Sanford: What if Memphis and Shelby County decided to get out to the tax break game? Wouldn’t that depress the economy here?

• “I don’t think it has an effect on these kinds of decisions. Governments are in charge of some things. They’re in charge of infrastructure in schools, and crime, a lot of quality-of-life-kinds of issues.

“At the margins, executives are making decisions based on those issues. Can I recruit other executives [to the city]? Is it a place families want to live?

“So, if we shifted from economic incentives to quality of life [improvements], we all know, or we all should know, that we would get a lot more benefit. If you have high-quality schools, and low crime, and great roads, and bicycle lanes, we all know that that’s a thriving community and that’ll be very appealing.”

Tax cuts for all:

• “There are alternatives; just give everybody a tax cut, right? Everyone agrees that any level of tax cut across the board, is going to stimulate the economy. There may be some disagreement about how much a tax cut stimulates the economy, but every tax cut helps the economy.”

• “If you do shift away from this winners-and-losers mode into a general tax cut mode, then you can stimulate a whole bunch of additional economic activity.”

We don’t even know how much money we’re giving away, right?

“First, you’ve got to quantify where the incentives are, which no one does a good job at, right? We don’t even know how much money we’re giving away, right?

“But if you were to quantify it and know what you were giving away and then shift as much as possible to just the general-tax-cut mode, then you can create a whole lot of additional economic activity, the same way that some of these other things like infrastructure, schools, law enforcement, and crime reduction create.”

On companies living up to their promises and clawback protections if they don’t:

• “They definitely don’t [have to live up to promises].”

We were told for years, “we’ve got these clawbacks” and “there are these clawbacks coming.” I mean, it’s laughable.

“We were told for years, ‘We’ve got these clawbacks’ and ‘There are these clawbacks coming.’ I mean, it’s laughable.

“I’m not trying to belittle anybody. But it’s just the truth of the matter. We don’t have clawbacks. We didn’t get anything back. It doesn’t happen.

“I’m not trying to belittle anyone because I understand the need to talk about jobs and it’s a really, really high-priority issue, but I’m just saying when these deals are done and put together with the customer, they just don’t happen the way they are advertised to happen.”

We need to have more transparency and debate around the future of tax increment financing (TIF) districts in Memphis and Shelby County. This broader discussion is needed because recent data from Illinois confirms that TIFs — which commit long-term tax revenues to development projects — have many unintended consequences and may even hinder the very development we as public officials desire.

As we move into a new budget cycle and prepare to deal with the complexities of school consolidation, we need to refrain from making impulsive decisions that will impact revenues and expenditures for decades.

TIFs leverage our future. As more and more tax revenues are pledged to specific projects, it will become very difficult to generate any additional revenues for the city and county. This reallocation of revenues will directly impact our ability to fund education and government services. A TIF is an alluring tool that in theory promotes economic development. In practice, a TIF more often subsidizes businesses and various social objectives.

The most recent example of a proposed TIF in Memphis drives home the need for a broader conversation on this funding mechanism. The Heritage Trail Community Redevelopment Plan, encompassing most of the core downtown area, includes a TIF designed to capture $45 million in revenue from properties that will generate higher taxes as their existing payment-in-lieu-of-taxes (PILOT) arrangements expire. In fairness, TIF districts should capture future taxes only from growth they directly inspire, and revenues from expiring PILOTs and inflation should be excluded.

We cannot afford uncoordinated development in Memphis and Shelby County. Future projects need to have a return on investment, and we need more transparency and accountability in decision making. A TIF district that proposes to capture PILOT revenue is not creating any incremental value. A TIF district should stand on its own, creating true incremental revenues. If we desire to subsidize public housing, we should make that direct decision and not fund it indirectly by creating a TIF district.

What we need now is a public review of all existing and proposed projects. In the private sector, capital spending is evaluated for a payback — the benefits have to exceed the cost. I do not see evidence of that return-on-investment discipline in our current public spending. We need to do better. We need to prioritize our projects based on value creation, and we need a comprehensive master plan for the city that will establish a strong core.

We also need an annual report detailing all existing TIF districts, their remaining life, and an independent analysis reviewing the actual benefits compared to the original plan. If a TIF district has outlived its use, it should be dissolved. We need to know where the TIF funds are being spent and who is responsible for the decision making. In short, we need more transparency and accountability.

In my opinion, we need to move away from the public credit card and shift toward a “pay as you go” philosophy. TIF districts are a creative way to use future revenues to pay for projects today, and it is relatively easy to position them as creating “free” money. The redevelopment agency that creates the TIF then becomes the exclusive economic development authority making spending decisions. There are no checks and balances with a TIF once it’s created. Just because we can create TIF districts to pay for public debt does not mean we should.

TIF districts were created to finance public infrastructure and encourage private economic development. In my opinion, TIFs should be excluded from our future economic tool kit. We need to reduce public debt, not expand it.

As we begin 2013, our elected leaders need to plan for the future. We need to be asking hard questions. What do we want Memphis and Shelby County to look like in 20 years? What types of capital spending are needed to achieve our goals? What are the urgent priorities and what projects will maximize our return on investment?

State and federal dollars are becoming scarcer, and the county and city should be very cautious about adding additional debt. TIF districts add to the public debt and remove revenues from the general fund. In my opinion, TIF districts may have had a place in the economic tool kit, but that day has passed.

Shelby County commissioner Steve Basar is chairman of the commission’s economic development committee.