Inequitable tax incentives

Inequitable tax incentives

December 5th, 2012 in Opinion Times

Correction

This editorial on local government's tax abatement policies mistakenly said that a local developer was granted a PILOT tax abatement for building a road up Aetna Mountain. In fact, the city granted Tax Incremental Financing status, known as TIF, to allow the developer to recoup his company's initial investment in constructing the two-mile road from the property-tax proceeds that will flow later from the mature development.

The City Council's debate on the cost, value and fairness of providing tax breaks for new or expanding businesses and development projects could not be more timely. But it is a devilishly problematic issue. It's not just a question of closing the barn door after so many horses have escaped. The larger issue is how to withdraw without harm from the competition of what's become a national race to the bottom among cities and states that don't see a tenable alternative strategy for competing for new jobs and retaining old ones.

Changing that paradigm will not be easy, especially in the current economic climate. Tax abatement has virtually become the first question addressed when new business developments are on the table, and developers are considering their options and tax-incentive offers elsewhere. Depending on their size and job-creating potential, they tend to expect the city, county and/or state government to provide them a tax incentive to land, or keep, their jobs.

Still, finding a way to wind down the givebacks is a goal worth pursuing. The current model is increasingly unfair to the citizens and existing business that ultimately are stuck with the bill for other businesses' tax breaks. To make matters worse, nearly every new tax giveaway heightens the already oversized and underfunded cost burden for public services -- for new classrooms, fire and police, and public utilities and services, from garbage pickup to sewer and stormwater run-off capacity.

Though it has broadened exponentially in recent years, this is not a new problem. It's been commonplace for decades for job recruiters -- and often job raiders from other communities -- to attempt to lure desirable businesses to their own communities, whether or not the businesses they pursue are considering expansions or relocation. Too often, that has spurred well-established businesses to seek or demand tax breaks or new infrastructure aid from local governments equal to what new or expanding businesses are receiving, simply as the price of staying put.

In any case, City Council chairwoman Pam Ladd was right to raise the issue. She specifically questioned the value and fairness of the city's PILOT deals, which allow "payments in lieu of taxes" to help new or existing businesses and developments locate or expand here. PILOT deals essentially abate a portion of city, county or state property and/or excise taxes for a specified number of years.

In a nod to the cost and value of public schools and the education of future workers, PILOT deals usually require payment of the countywide school tax for the county school district's operating budget. But even that condition falls short of overall taxpayer costs for schools: It does not include, for example, the capital costs for new schools. These huge expenditures are funded by the county's general revenue bonds, which are paid off through general (non-school) county property taxes.

Beyond that, the new schools financed are generally located in new suburban areas outside the city -- the current projects call for two $20-million-plus schools, one in Ooltewah, the other in East Brainerd -- where city property taxes do not apply. That means that city residents who subsidize city PILOT deals, and who constitute half the county's population and tax base, do not get a direct benefit from new schools built through their county property taxes.

Considering these drawbacks, it's lamentable that the City Council recently approved a PILOT tax abatement for a private residential development for the cost of their road up Aetna Mountain. That precedent, as critics warned, has already enticed two other developers to seek a similar tax break.

Such inequities will continue to haunt general residential and commercial taxpayers, further compounding the harm to local communities of the nation's runaway drift toward inequitable subsidies for new business development. The mantra of job growth aside for such subsidies, there should be a tighter standard.

A current New York Times investigative series, the "United States of Subsidies," for example, found "that states, counties and cities are giving up more than $80 billion each year to companies" -- and probably far more than that -- in efforts to attract job growth. Yet the benefits are rarely tracked, and often are outweighed by the costs of tax abatements; by subsequent business closures; by the failure to secure family-wage jobs in the deals; and by the ultimate costs to state and local governments, which then have to squeeze their budgets, leaving municipal and public burdens unmet.

The Times report further confirmed the obvious, that big corporations exploit the urge of desperate state and local governments for job creation, and pit them against each other in a virtual bidding bazaar to secure the most lucrative tax abatement offers. Among its examples is an offer of a $1.5 billion tax credit by the state of Pennsylvania -- in competition with West Virginia and Ohio -- to Shell Oil for an energy production facility. This largesse would immensely benefit the parent company, Royal Dutch Shell, which made $31 billion in profit last year (or about $3.5 million an hour)-- and whose CEO made $13 million last year. Yet, The Times reported, Pennsylvania did not actually require Shell to generate jobs, though it expects a wave of them.

The state-county-city tax abatement package that lured Volkswagen here cost $572 million. The returns here may ultimately offset the expense, but it nevertheless is a reminder that tax abatement can be stunningly costly -- and must be offset by a proportional number of family-wage jobs. Ultimately, the best job creator may be our own taxpayer investment in hugely successful schools and outstanding quality of life. That would draw companies, and their jobs, without tax incentives and their inescapable inequities.