Memphis economic development officials wasted little time launching an information campaign about Memphis and Shelby County’s primary business incentive program.
On July 16, less than a month after the Memphis City Council adopted a budget that included deep cuts to employee and retiree benefits, the Greater Memphis Chamber posted a video exploring how the payment-in-lieu-of-taxes incentive program works and why it is needed.
The nearly five-minute video, titled “PILOTs 101: Why Memphis Needs the Payment In Lieu of Tax Program,” walks viewers through the competitive landscape of business recruitment – where the prize is much-needed local jobs – and the nuts and bolts of how the PILOT program works.
“It’s not an easy topic to grasp,” said Dexter Muller, senior vice president for community development at the chamber. “It’s not only elected officials interested in the topic, citizens are as well. (The video) lets citizens or anyone else who is interested in it get an economic developer’s view of it.”
The PILOT program has been a lightning rod for criticism for years, particularly from municipal labor unions and some residents who view the incentives as corporate welfare that erodes the tax base.
That simmering criticism boiled over in June as the council voted to slash some benefits for employees and retirees. Union leaders, employees and retirees and residents said the tax breaks given to companies to locate or expand in the city and county were to blame for the painful cuts.
Council members will get a presentation on the PILOT program in two weeks, and several members have signaled a willingness to make some changes.
“My impression is most council members are open to a review of tax incentives, but it really depends on the details,” said council Chairman Jim Strickland.
The PILOT program works by abating taxes – 85 percent on the city side this year, before dropping to 75 percent next year, and 75 percent on the county side – for real and personal property improvements. Companies pay the full amount of taxes on the pre-developed land. A scoring matrix that includes the number of jobs created, wages, capital investment and other factors determines the length of the PILOT term.
A cost-benefit analysis is performed to ensure that for every $1 in taxes abated at least $1 in new taxes is produced. To qualify for a PILOT, companies must produce at least a $1 to $1 tax ratio, and the vast majority of PILOT recipients far exceed that amount. Once the PILOT term ends, the companies pay the full amount of taxes.
But misunderstanding has swirled around the program for years.
“Many people think when a business gets a PILOT they’re literally getting cash money from city and county government, and that’s just not true,” Strickland said.
Earlier this year the Economic Development Growth Engine of Memphis and Shelby County, which administers the PILOT program, launched a review of the incentive program.
Although they have developed new incentives targeting small businesses over the last two years, Memphis and Shelby County have relied heavily on the PILOT program to offset the cost of property taxes to larger businesses that locate or expand here.
A 2010 report from the Tennessee Advisory Commission on Intergovernmental Relations said exemptions and tax incentive programs suck “millions of dollars in uncollected taxes” from local governments and “impose unfair tax burdens on households and businesses” that don’t receive the incentives.
A recent letter from the state comptroller to city and county leaders also warned about the effects of the “aggressive use of PILOTs as an economic development tool.”
But the PILOT is virtually the only incentive available for companies exploring Memphis, which has the highest combined property tax rate in the state, or Shelby County.
If the city and county are competing with other communities, which often offer their own form of incentives, for a project, the PILOT can tip the scales in favor of Memphis and Shelby County, Muller said.
“Nobody wants to provide incentives if you don’t have to,” Muller said. “Our view is the program does generate dollars and it’s not a matter of giving away something you’ve never had.”
The PILOT program has been changed several times over the years as the political winds appeared to blow against it.
In 2008, city and county legislators installed a residency requirement for employees of firms receiving PILOTs and capped the number of employees for which incentives applied, among other changes.
But faced with a declining economy, fierce competition with other cities looking to lure business and a backlash from site selection firms and others, those changes were rolled back less than a year later.
PILOT opponents often contend that businesses that benefit from the tax breaks don’t deliver on the amount of promised jobs or capital investment, but EDGE data show that PILOT recipients have, as a whole, more than delivered on their promises. As of May 2013, 52 active PILOTs promised 10,324 jobs but delivered 11,589 and beat capital investment numbers by over $140 million.
“We are very much for companies needing to be responsible delivering what they commit,” Muller said. “Overall, when we’ve looked at it they’ve over delivered on what they said.”
Muller said he understands why lawmakers want to review the program and vowed that the chamber would remain engaged in the process.
“We participated in every round of dialogue they’ve had on it,” he said. “It’s appropriate for council members to continually evaluate the different policies and incentives they have.”