PILOT tax breaks necessary, Chamber study says

Tax rates far above Nashville’s and other peer cities have slowed Memphis’ economic engine, says a new study released by the Greater Memphis Chamber.

Spurring the economy requires officials revamp or close the city-county EDGE board and continue to rely on PILOT property tax breaks to compete with peer cities’ lower tax rates, said Richard Smith, the chamber chairman.

PILOT tax cuts have proved controversial among Memphians, who contend they are handouts that only reduce tax revenue available to fund schools and governments services. The tax breaks were assailed by almost all the candidates seeking the office of Shelby County mayor in the spring primaries.

Smith contends the study, performed by Boyette Strategic Advisors of Little Rock, confirms the tax breaks are essential to help Memphis compete in economic development with cities such as Nashville, where tax rates are 40 percent lower than Memphis.

“The community at large needs to understand — and accept — that we are in competition for investment and jobs. I’m not certain that this is truly understood by everyone,” Smith said. “Some seem to think we can demand that businesses choose Memphis, bring highpaying jobs here, and they will magically appear and oblige.”

The procedure for providing the tax breaks in Memphis is cumbersome compared to peer cities, says the study, commissioned by the chamber in early summer to use as a model for revamping its economic development strategy.

Smith, a voluntary chairman of the chamber employed as chief executive of FedEx Corp.’s FedEx Trade Networks, said streamlining the cumbersome PILOT award process would help Memphis to step up its recruiting efforts.

After EDGE was formed in 2012, the number of companies considering Memphis for expansion sharply declined and is now five less than in 2011, Smith said. Noting the city must grow its tax base to continue to afford government services, Smith said attracting new firms is the fastest way to achieve growth.

“Saying we shouldn’t offer incentives is akin to me walking into an air freight bid and telling the customer, ‘Look, I know all these other providers are offering you competitively discounted pricing in order to win your business, but I’m going to walk you through lots of terms and conditions up front and then I’m going to offer you list rates and no discount,’ “Smith said.

“That’s precisely what’s happening to Memphis and Shelby County today,” Smith said. “Our competitors love us.

Our cluelessness and complacency is helping them to grow at our expense.”

The study follows Smith’s call earlier this year for reforms.

His position was considered upsetting for some civic and political leaders when he contended the economy here has failed to grow for two decades despite a wide range of economic development activities.

He has focused on revamping EDGE, the shorthand name for the primary agency responsible for the PILOT tax breaks.

The letters stand for the Economic Development Growth Engine for Memphis and Shelby County. PILOT stands for payment in lieu of taxes. Businesses awarded PILOTs for new plants pay taxes on the land’s value before development and pay 25 percent of the taxes on building and machinery for a specified number of years.

About $500 million in property taxes have been abated by EDGE. The agency figures tax breaks have saved or created nearly 20,000 jobs. The taxes paid by those workers exceeds the volume of tax cuts. The agency also has launched programs aimed at revitalizing neighborhoods and growing local businesses.

“We’re in there trying hard,” Memphis lawyer Al Bright, chairman of the EDGE board, said in a recent interview. “We all want more and better jobs for Memphis at the end of the day.”

Rather than have Bright as his direct boss, EDGE was set up so chief executive Reid Dulberger reports to Shelby County Mayor Mark Luttrell and Memphis Mayor Jim Strickland. Smith contends EDGE was meant to be nimble but reporting to politicians has slowed its ability to adapt over time.

Firms considering expanding in Memphis often view as onerous the PILOT rule that requires they allocate a share of their spending to local minority vendors, Smith said. But finding suppliers has been a problem. Instead, EDGE and other Memphis agencies ought to identify capable minority vendors. EDGE then could adjust the PILOT so the abatement increases as firms step up their minority spending, Smith said.

“EDGE was designed to streamline things. It still can,” Smith said. “So we either need to fix it and take it back to what it was envisioned to be, a true onestop shop that’s more focused on growing our economy than it is on pleasing politicians who have never run a business, or we need to kill it and start over.”

The new study will be used as the foundation for the new economic development strategy at the Chamber. Parts of the foundation have already been put in place with the hiring earlier this summer of new officials including David McKinney as senior vice president of public policy and Eric Miller as senior vice president of economic development.

Details on that new strategy will be presented to the public at a later date, a chamber official said.

“The chamber shares some culpability,” Smith said. “And we’re working on improving those deficiencies. Again, though, we’re member funded and member-led. So change at the Chamber can happen swiftly, because folks actually understand what’s broken and they want to grow and are willing to make necessary changes.”

In defense of PILOTs, the Boyette report points out a manufacturer would spend far more to put a plant in Memphis than four other communities studied. Over five years, total taxes on that plant would reach $121.8 million in Memphis without tax breaks; $112 million in Indianapolis; $100.2 million in the Memphis suburb of Olive Branch, Mississippi; $95.8 million in Birmingham, Alabama; and $91 million in Clarksville, Tennessee. The report notes: ❚ PILOTs are “one of the only tools for competing with peer cities and even with tax abatements to offset our higher-than-other municipalities property taxes, our processes for getting those abatements have far more fees, requirements and steps than peer cities – particularly those competitors.”

❚ Economic development programs are “only aggressively competitive for Distribution projects, but we lack new infrastructure investment to compete with North Mississippi.”

❚ The economic development “ecosystem doesn’t function as well as many of our competitors. There are too many silos and not enough regional collaboration.”