published Wednesday, December 5th, 2012

Inequitable tax incentives


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.

Comments do not represent the opinions of the Chattanooga Times Free Press, nor does it review every comment. Profanities, slurs and libelous remarks are prohibited. For more information you can view our Terms & Conditions and/or Ethics policy.
aae1049 said...

I challenge you to show where the revenue from PILOT Agreements is returned to the taxpayers of Chattanooga. It is not returning in sales tax revenue, which has remained flat from 2008 to present, and it has not returned in property taxes, which are also flat. As a city taxpayer, I do not want to hear about theoretical returns, show us the cash in revenue streams. Quantify and show me the financial return to the city of Chattanooga, that will result in repayment of the local taxpayer investment.

December 5, 2012 at 6:25 a.m.

Yesterday, the city council voted to exempt an apartment building and wealthy corporation from paying their share of city property taxes for services, under the PILOT (payment in lieu of tax) incentive program. PILOT is a method where our local governments issue incentives to select corporations that meet criteria set forth by the Chamber of Commerce and River City Company.

The "case by case" approach is smoke and mirrors political pandering to continue issuing PILOT's.

The taxpayers of Chattanooga were thrown under the bus once again to pay a wealthy corporation’s share of city services. The city council voted to add another wealthy corporation to their ever expanding A-list of 50 private corporations that are exempt from paying city property taxes.

Why should we care?

The city council's approval of this PILOT is an action that guarantees that you and I will pay and subsidize this corporation’s share of property taxes for city services until the year 2028. This corporation will indeed receive fire and police protection, their road will be paved, and their infrastructure will be maintained, but will not pay for the services from 2013-2028.

By their own application disclosure, Walk2Campus properties currently owns 100 properties with over 1000 tenants located on 6 college campuses.

Walk2Campus’ business model recognizes that a viable market exists to generate profit. That’s the essence of capitalism, so please Walk2Campus please proceed, but without welfare from existing business and taxpayers subsidizing your profit through property tax exemptions.

Under the PILOT incentives at issue, the city council proposes to exempt this Walk2Campus from paying city property taxes from 2013 to the year 2028. What this means is that existing apartment buildings in the area that rent to UTC students will be paying this company’s share of property taxes and their own. Existing apartment building owners are rendered less price competitive, because they are paying city property taxes, and their competitor’s share of city taxes. Sounds absurd, doesn’t it?

The Chamber of Commerce and River City Company would argue that without giving corporate welfare to Walk2Campus properties, and the rest of us paying their share of services through PILOT incentives through 2028, the project would not occur.

The Chamber of commerce and River City Corporation are exempting business and housing from property taxes in an arbitrary model that operates on first come, first serve bases, and areas hand picked by Kim White, rather than the quality of the taxpayer investment, and criteria that ensures only wealthy corporations or areas can participate. Small business is completely excluded from PILOT incentives. The model is highly flawed and needs to be evaluated for impact on the city’s revenue streams.

Little Chicago Watch is concerned about this expanding A-List of PILOT incentives that are depleting city services.

Citizen watch is watching.

December 5, 2012 at 6:42 a.m.
gjuster said...

Harry - welcome to the Tea Party. We have been railing against corporate welfare for years.

December 5, 2012 at 7:27 a.m.

I wish you had gjuster, but the Tea Party as a movement is itself funded by too many corporate interests for me to given credence.

Notice how you're far more likely to see Tea Party members attack Democrats for being soft on illegal immigration, for giving out "handouts" to the poor than you are to see them railing against Tyson for hiring illegals or for Wal-Mart for under-paying their workers while raking in profits from SNAP.

How many signs at Tea Party rallies will I see condemning the corporate welfare in the Middle East?

I'm afraid the Tea Party movement has not been what you claim for a while, if it ever was.

December 5, 2012 at 11:07 a.m.
potcat said...

Welcome to the Free Market, Private Corp.of America. The biggest Welfare recipients in the world...................

December 5, 2012 at 1:01 p.m.
aae1049 said...

Happy you should lay off the Boones Farm in day.

December 5, 2012 at 3:28 p.m.
gjuster said...

Happy - you have no clue about what the Tea Party really stands for. I was against the Volkswagen giveaway before it happened - and said so on the radio and in print. I was against (as were most TP people) against the bank bailouts, GM/Chrysler, developer grants, and similar corporate welfare - and have not strayed from that. Corporate welfare is backed by both parties - and most TP people are against it. You are getting your info from the media - not a reliable source.

December 5, 2012 at 7:42 p.m.
please login to post a comment

videos »         

photos »         

e-edition »


Find a Business

400 East 11th St., Chattanooga, TN 37403
General Information (423) 756-6900
Copyright, Permissions, Terms & Conditions, Privacy Policy, Ethics policy - Copyright ©2014, Chattanooga Publishing Company, Inc. All rights reserved.
This document may not be reprinted without the express written permission of Chattanooga Publishing Company, Inc.