Eleven days before Christmas, Helen Burns Sharp came to one of the Hamilton County Commission's last meetings of 2022 bearing gifts — a set of place mat-sized, laminated, colorful maps showing all the tax-exempt properties in the city of Chattanooga.
The founder of an organization called Accountability for Taxpayer Money, Sharp has been a persistent, vigilant voice on the subject of tax increment financing and payment in lieu of taxes agreements — two economic development tools that the city of Chattanooga and Hamilton County have used over the years to spur job creation and growth.
"I recognize the need for TIFs and PILOTs in our economic development toolbox," she told commissioners as they examined the documents. "However, ATM urges caution and discretion when future requests come to you. Here's why: In tax year 2022 alone, existing TIF and PILOT agreements meant that about $26 million did not go to the city and county general funds to pay for services like fire and police and streets and parks and homelessness and affordable housing."
Most of the annual tax revenue forgone under the special tax arrangements — about $17 million — stems from an ongoing agreement with Volkswagen Group of America. The company is credited for a payment in lieu of taxes, meaning the business is excused certain property and business taxes as thanks for the jobs or economic development being created by that business. The PILOT will last about 30 years.
The place mat-sized map also includes thousands acres of property owned by nonprofits, churches and the city, county and federal governments — showing how much land has been sidelined from the tax rolls to serve certain government priorities. That includes 3,000 acres of nature park in Enterprise South and another 1,200 acres of industrial property there that officials hope to add to the tax rolls.
"What we tend to think about from an economic development standpoint is getting property to generate additional revenue for Hamilton County and Chattanooga," Charles Wood, of the Chattanooga Area Chamber of Commerce, said in an interview. "The way you get new revenue is by encouraging investment on property that's not generating what it could."
Economic development officials argue that, even if tax incentive agreements resulted in deferred revenue for a while, they will ultimately result in an overall boost to the city and county tax bases.
PILOTs are essentially tax breaks. They cut the amount of property tax revenue a business has to pay to the city and county over an established time frame. Officials often offer them in exchange for the business creating a set number of jobs or investing a specific amount of money into their operations.
Tax increment financing, meanwhile, is a tool reserved for blighted areas. Officials draw a district across a number of acres and use any new property tax revenue raised beyond the existing baseline to finance development in that area. Usually, that funds public infrastructure like streets or sewers.
Proponents say such an arrangement is not taking any tax money because it only captures new collections spurred by a development such as the proposed Chattanooga Lookouts stadium in the South Broad District. Opponents say the benefits of such a tax district are overblown, that development would likely happen in the area anyway.
In Hamilton County, neither PILOTs nor TIFs have an impact on money going to schools, and any new schools revenue generated under those arrangements continues to be reserved for education. These agreements can last anywhere from 10-30 years, Sharp noted, and during that time the tax burden for general government services shifts to residential taxpayers and small businesses, which she warned could contribute to the need for a property tax increase in the future.
Economic development officials say the tools – particularly TIFs – are used less frequently in Hamilton County and Chattanooga compared to peer governments in Tennessee. Knox County is the statewide leader with 30 active TIFs, according to the Tennessee Comptroller's Office, while Davidson County has 15. In Hamilton County, there are five — four of which were approved over an approximately four-year period.
"We are definitely more conservative than Knoxville, Nashville and Memphis," Wood said.
Between January 2020 and December 2022, he said, Hamilton County has approved four PILOT agreements. In the same time frame, both Shelby and Knox counties approved more than 10 apiece.
A RECENT PILOT
On Wednesday, Hamilton County officials will decide whether to approve a five-year PILOT for a company in East Ridge — TPC Printing & Packaging.
The 99-year-old family business specializes in printing and folding containers for the cosmetics, spirits and fashion industries. It plans to add more than 90 new jobs paying an average of nearly $49,000 per year and build a 60,000-square-foot expansion to its manufacturing plant on Ringgold Road.
According to the proposed agreement, TPC won't pay any property taxes to the general funds of the city of East Ridge or Hamilton County in year one of the PILOT, but that amount will gradually increase over the term of the deal. As is standard for these arrangements, the company will continue to pay the entirety of the property taxes due for Hamilton County Schools.
The agreement also contains a set of clawback provisions. According to its incentive deal, the company must have created 72 jobs and invested $16.8 million by March 1, 2026. Otherwise, East Ridge and Hamilton County can cut the tax relief the company receives in years that it falls out of compliance.
TPC has experienced rapid growth over the past several years and was running out of space at its 150,000-square-foot building in East Ridge. In an interview Wednesday, President Joey Schmissrauter said the company had evaluated some alternative sites for its expansion, but none of them fit the location requirements TPC needed to maintain its workforce.
"We were going to lose a lot of people if they had to commute," he said. "We looked in Cleveland, we looked at North Hamilton County, we even looked in North Georgia, but we had this 3-acre lot adjacent to us, and East Ridge is part of the border cities initiative. Right now, there's a lot of growth going on at Exit 1, and it's just an ideal place for us to do the expansion."
Local officials argue that the PILOTs and TIFs are an essential part of their economic development toolkit, helping to keep Chattanooga in the mix as it competes with similar communities for jobs and business.
"In the Kelly administration, we're trying to be blight busters here," Jermaine Freeman, Mayor Tim Kelly's senior adviser for economic opportunity, said in an interview, "because there are parts of our city that feel like they have not seen the sun rays of economic development, and they've been disinvested for a long time."
A recent study completed by Ernst & Young for the chamber found that Hamilton County's population grew 3.8% from 2017 to 2021, which is faster than the 2.6% growth rate across the United States but slower than the 5% rate statewide. Cities like Huntsville, Alabama, and Knoxville have seen their countywide population grow over that four-year period, at rates of 11.6% and 7.2%, respectively.
"These are cities that we've always looked at as peer cities, and based on that study, those cities are outpacing us," Freeman said.
Freeman said those peer cities already have strong economic engines — Knoxville with the University of Tennessee and Huntsville with Redstone Arsenal — and Chattanooga officials also want to be in a position to create as many economic drivers as possible.
"When we say grow the city, we don't mean that we want to be Nashville or Atlanta," Freeman said. "We just want to have sustainable growth so that people continue to want to come to visit and live, work and play in our city. And at the end of the day, if the city isn't growing, it's shrinking."
The study shows that Chattanooga also lags Huntsville and Knoxville in employment growth — 2.1% in Chattanooga versus 7.8% in Huntsville and 2.5% in Knoxville. However, Chattanooga is more competitive in average wage growth, boasting an 18.7% increase between 2017-2021 that is equal to Knoxville and just shy of Huntsville's 19.7%. Chattanooga's average annual wage in 2021 – $56,700 – was about on par with the average wage statewide – $56,800.
"What we're seeing is nothing like what a lot of other cities in the South are seeing," Ellis Smith, the mayor's director of special projects, said in an interview, "and we can either let that growth steamroll us and run over us, or we can leverage that growth to also invest in the infrastructure necessary to support it."
Competition for new business is especially fierce in the Southeast, Wood said.
"In the Southeast, economic development is like SEC football," he said. "It's highly competitive. There are winners and losers. ... Because of that, incentives are just part of the process."
Sharp has said that one of the most important considerations is whether those incentives are needed for the project to occur — the "but-for" test. Wood argues that test is an innate part of how local economic development officials vie for major projects.
"If you're in competition for a project, and they're looking at another community, the reality is you have a significant chance of not winning that project," Wood said. "As we are in those competitive dynamics where they're looking for multiple communities, that is 'but-for' — because if you don't have the incentives, you're not going to be able to compete with the other communities."
Wood said it's also taken Chattanooga longer than other cities to adopt tax increment financing as a tool for development.
"Most communities across the country that have seen a revitalization like Chattanooga has have relied almost entirely on tax increment financing," Wood said. "We are blessed with a significant amount of philanthropic capacity that most communities don't have, and that was used extensively for downtown."
The city's latest TIF, a 540-acre span in the South Broad District, will act as the primary funding source for an almost $80 million stadium for the Chattanooga Lookouts, which city and county leaders hope will motivate upwards of $1 billion worth of development in the surrounding area. It also marks the first time that neighbors will be negotiating a community benefits agreement as part of a TIF.
Michael Gilliland, a community organizer with Chattanoogans in Action for Love, Equality and Benevolence, said in an interview that 10 organizations have been involved in crafting a set of negotiating points over a whole host of issues.
That team has been communicating with the master developer behind the project, Jim Irwin of New City Properties, and the Chattanooga Lookouts to create a legally binding contract. The community benefits team hopes to be in a position this summer to have clear commitments finalized, specifically those related to the stadium.
In broad terms, residents hope to see permanent living wage jobs result from the project that will employ people in the surrounding area. Community members also want developers to prioritize local contractors and workers during construction and make sustainability commitments around water retention and energy efficiency.
"This is an area that's been rife with environmental degradation and pollution," Gilliland said. "In the 1980s, Chattanooga Creek was one of the most polluted waterways in the country, according to the EPA. There are still questions about Chattanooga Creek," which intersects the Wheland Foundry/U.S. Pipe property where the stadium would go.
Gilliland said Chattanooga has a horrible track record with TIFs and PILOTs. With TIFs, he said, the increase in property values hasn't been significant enough to support development or affect broader change. The one established for the Lookouts stadium, however, is different, sitting on about 140 acres of brownfield that has sat vacant for a long time.
"I think that there are going to be some clear benefits," he said. "There has to be a large increase in tax revenue coming off that site considering that it has been unused for two decades. That change is going to result in increased tax revenue across the board."
Gilliland credits Sharp with bringing stronger scrutiny to the topics of TIFs and PILOTs. The organization he represents, CALEB, held a series of candidate forums during the most recent mayoral and City Council races focused on economic development and the desire for a clearer, more transparent approach. The city and chamber have been working for the past 18 months, he said, on a more thorough evaluation process for PILOTs.
"Chattanooga went for way too long with this begging mentality that public incentives are necessarily tied to any development that occurs and were so willing to with very little scrutiny, very little process to include public investment ... with a large number of projects," particularly with PILOTs, Gilliland said.
The city is also looking at alternative options for TIFs.
Chattanooga's TIF policy, which the city adopted in 2015, includes a blanket prohibition on using the funding mechanism for housing projects. Freeman believes that was intended to serve as a way to stop the use of tax increment financing for single-family housing, a response that possibly stemmed from a tax district created in 2013 for the Black Creek housing development. Under state law, the city's industrial development board can use TIFs for affordable housing.
"It might have been a bit of an oversight to not account for the fact that the state does allow TIFs to be used to develop multifamily housing," Freeman said, permitting it for people of low- to moderate-income, senior citizens and people with disabilities. That's still an ongoing discussion, but it hasn't yet been formally adopted into the TIF policy.
Likewise, the way the city and county handle PILOTs has evolved, Freeman said. Older agreements that are now beginning to sunset were structured in ways by which the company did not pay any taxes aside from those that would go toward schools.
In 2016, Freeman said, the general structure of PILOTs began to change so that total property taxes abated would gradually decrease as the agreement expires. Freeman said that adjustment occurred because city and county officials wanted to see more revenue come in sooner. As Chattanooga has seen economic expansion over the years, he said, the city has also settled into a stronger negotiating position.
"We still may not be killing it, but we have gotten to the point now where we're also not the red-headed stepchild," Freeman said. "We can be more selective in terms of how we structure our PILOT agreements."
The city is also working on developing PILOT policy, he said, that should provide more transparency to the general public about the city's expectations for those arrangements and also offer more predictability for companies hoping to apply for one. Freeman believes the city hasn't historically had a PILOT policy because those types of incentive agreements have been fairly infrequent over the years.
Former Chattanooga Mayor Ron Littlefield compares tax incentives to the atomic bomb.
"You've got to be willing to have it and use it if you have to," he said in a phone call. "Otherwise, you're at the mercy of all these other jurisdictions that are willing to do it."
There have been times when PILOTs haven't been used judiciously, with Littlefield recalling that the instrument was once used decades ago to support the establishment of a Bojangles somewhere in Hamilton County.
But Littlefield was also in office when Volkswagen announced in 2008 its plan to build its only U.S. production plant in Chattanooga, a transformational project that he said has changed the county's trajectory for the better.
As mayor, people would often come into his office to criticize the amount the city and county had invested into attracting the company to the area. Littlefield kept a facedown copy of the Huntsville, Alabama, newspaper on his desk for those occasions, which he would flip over to reveal a front page headline in what he estimated was 2-inch tall font: "Wheels fall off city's Volkswagen dream."
"We beat Huntsville in the competition for Volkswagen," he said, "and I said, 'That could have been the Chattanooga Times Free Press if we had not done everything that we did to get Volkswagen here.' Yes, they probably run a little bit more out of us than we would have liked, but we got them here. And that paid dividends."
When they look at her map, Sharp hopes public officials and Chattanooga taxpayers understand the need to be careful when approving future tax incentives. Future incentives, she said, should be reserved for significant taxpayer investments that won't occur if public dollars aren't available to help reduce the risk.
The terms should also be as short as possible, and developers and property owners need to have "considerable skin in the game." All agreements should have strong clawback language if the applicant does not meet commitments, and local governments should be sure to adopt and follow sound written policies for approving new TIFs and PILOTs, she said.
"I think the more interested citizens we have, the better, and that an active and informed citizenry benefits everyone," Sharp said in an interview. "In the case of incentives, for example, we need more people following local government and holding it accountable.
"I hope our public officials will come to view citizen involvement as a positive and not a negative," she continued. "If we can create political culture open to constructive questions and suggestions, it could lead to better incentive agreements and more trust in government. I don't in any way think that I have all of the answers, but I do think I know some of the questions."