Out of Control Policy Blog

Fad Watch: Targeted Tax Incentives

Somewhat related to this post, is this Forbes piece by Frederic Sautet:

    [T]targeted tax incentives don't spur real growth. Quite the contrary. While across-the-board tax cuts expand economic activity, targeted tax incentives are inevitably financed at the expense of established businesses. Today's winner of a targeted tax break is tomorrow's victim of a broad increase in business taxes. Assuming, that is, that this employer sticks around.

    Memphis, Tenn.'s Payment-in-Lieu-of-Tax (Pilot) program is a case in point. For 18 years Pilot has created property tax holidays (of up to 15 years) for businesses adding jobs in the city. The cost, as measured by local and state authorities in the last thorough study (for 2002), was 7.4% of property tax revenue, or $23 million a year.

    What does Memphis get for its $23 million? According to a study paid for by the city, Pilot created 65,000 jobs between 1988 and 2000. But that claim is tough to reconcile with the city's unemployment rate. In 1990 the rate equaled the national average. Now, at 7%, it's two points above the national level. Memphis' poverty rate is 21.5%, twice the national average.

    Here are a few more damning numbers: Between 1993 and 2002, 21 companies in Memphis received Pilots but then had the Pilot terminated, usually because the company didn't live up to the promises it had made in order to win the tax breaks. In that same time period another 19 companies that got Pilots and kept their promises by staying a certain number of years eventually left the city for greener pastures.

    One specific example: SubmitOrder.com, a now defunct order-fulfillment company for Internet retailers. In 2000 the company promised to invest $79 million and generate 971 jobs with a median wage of $27,600. In exchange, the city granted SubmitOrder a 15-year property tax freeze. SubmitOrder stayed in Memphis for just one year and generated only 50 jobs during that time.

Aricle here (free reg req); via Peter Gordon.

Ted Balaker is Producer


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