Expanding Corporate Welfare 

Developers and their friends pull out all the stops in the latest push for incentives.

At a time when corporate scandals are at the top of the daily news, antitax sentiment is surging, and Shelby County has a debt crisis, expanding the benefits of corporate welfare would seem to be about as popular as the flu.

But the influence of developers over a docile media and public officials and an uninformed public should never be underestimated.

Developers and their friends pulled out all the stops this month to get Memphis City Council approval of a controversial expansion of tax incentives at a time when political candidates dared not mention higher taxes in the 2002 campaign. Yet critics of incentives say that higher property taxes for homeowners is inevitably one of the consequences of such tax breaks.

The new wrinkle in incentives extends them for the first time to companies that move into existing unoccupied buildings in Memphis and suburban Shelby County, where there is a glut of office and warehouse space built during the booming 1990s. Under the old rules, incentives could only go to new buildings and corporate headquarters in the suburbs or certain developments that revive downtown and the inner city. The new measure, approved by the Shelby County Commission in August just before several members' terms expired, would roll back property taxes to the value of the land.

If form holds true, it could set a precedent for follow-the-leader companies and developers to seek tax incentives for so-called second-generation buildings vacated by once high-flying companies such as SubmitOrder.com, PlanetRx.com, Celcore, and Sitel that went bust or were taken over or moved away from Memphis.

The city council action did not come without objections and restrictions on the use of the new incentives. It was the product of a public-relations campaign that included a timely seminar on the history of incentives, a partnership between bond attorneys and The Commercial Appeal, a corporate expansion long on fluff and short on facts, liberal use of the "Indianapolis threat" and the decaying inner city to justify more goodies, and heavy lobbying and a last-minute end run at the council.

The trigger for all this was a request from Pannatoni Development, an international commercial development company, on behalf of Thomson Multimedia, a Paris-based company with an American subsidiary called Technicolor. Based in Indianapolis, Technicolor distributes film prints, DVDs, CDs, and videocassettes. The company says it employs some 2,000 people in the Memphis area and would add 1,262 more if it undertakes an $85 million expansion here instead of in Indianapolis. Based on those numbers, Thomson sought a 15-year tax abatement worth $9.8 million.

Bearding the Media

On November 7th, about 75 developers, attorneys, and business leaders met at the University of Memphis for a seminar called "Building a Better Memphis: The Role of Economic Incentives." The seminar was co-sponsored by the Armstrong Allen law firm and The Commercial Appeal. Armstrong Allen represents clients seeking tax incentives and tax-free bond financing from the Center City Commission and the Memphis and Shelby County Industrial Development Board. Guests were welcomed by Joseph Walker of Armstrong Allen and John Wilcox, CEO of The Commercial Appeal.

James McLaren of Armstrong Allen sounded the theme for the seminar: Incentives are as American as baseball and apple pie. Land grants spurred the pioneers to cross the Appalachian Mountains and the railroads to crisscross the American West. This was a good thing. They were also used in the 1960s to promote urban renewal by government. This was a bad thing.

More recently, McLaren noted, incentives in the form of roads, sewer extensions, and new schools have been used in Shelby County to cause growth in and flight to the suburbs. The process of getting a tax break, or a PILOT (payment in lieu of taxes), is quick and easy and "all you have to do is go in front of a group of businessmen like yourself."

Developer Henry Turley (chairman of the board of Contemporary Media, Inc., parent company of this newspaper) spoke next on behalf of tax incentives for downtown development to level the playing field with the subsidy provided "at the margin" in the form of infrastructure such as Nonconnah Parkway and the Gray's Creek Sewer. Other speakers discussed federal and state incentives.

No mention was made of the views of Native Americans, farmers, muckraking writers, antimonopolists, or economists and academics who argue that incentives are a zero-sum game that shift the tax burden to homeowners. No mention was made of the Memphis/Shelby County property tax rate of $7.02, compared to the $4.58 rate in Nashville, where PILOTs are rare. And no mention was made of the alarming number of companies in Memphis that have received incentives only to fail to live up to their commitments to create jobs and occupy the new buildings that now sit empty in Memphis and Shelby County.

The "Silicon Valley of the Mid-South"

In an article in March 2001, The Commercial Appeal dubbed Memphis "the Silicon Valley of the Mid-South." The basis for this preposterous claim was the supposedly booming dot-com economy tied to FedEx, the theme of America's Distribution Center, and the "fast-growing" businesses in the Internet supply sector.

Less than two years later, most of the Memphis dot-coms are out of business or never attained their projected sales and employment numbers.

In 2000, the Memphis Regional Chamber's Memphis 2005 economic development project commissioned Hillwood Strategic Services to do a study of the Southeast Industrial Corridor where many of the new warehouses are located. The report was part of the handout at the "Building a Better Memphis" seminar, but apparently nobody bothered to look at it.

"Today's global business trends reflect customer favored quick-to-market locations," the report says. "This trend has intensified the clustering of distribution-oriented activities. The emergence of e-commerce promises to intensify these trends as well."

The report listed several dot-coms it said had located or expanded in the Memphis market.

The only problem: Of 15 dot-coms, only a few are still in business, notably BarnesandNoble.com and Williams-Sonoma.com. The rest either failed (including PlanetRx.com, SubmitOrder.com, and WarGames.com), never came to Memphis at all, or fell somewhat short of Silicon Valley status. One well-publicized harbinger of the future, Zoomedia.com, changed its name to Zoomedia Inc. and has a total of four employees.

The bigger operations, such as SubmitOrder.com, occupied warehouses and received tax credits from the Memphis and Shelby County Industrial Development Board (IDB) based on aggressive employment projections. A company has three years to fulfill its employment commitments. If it doesn't, the IDB can use a "clawback" provision to reduce or take away the tax incentives.

Given the failure rate of dot-coms and telecoms, you would think the IDB would tighten up its accountability procedures. But the opposite is true. Until two years ago, the annual report of the IDB was a true report card. It listed all the applicants for tax incentives and kept score on their job fulfillment. With a little digging, the press and public could get an incomplete but useful snapshot of who was for real and who wasn't.

The report card served as a watch list and a warning that developers and their corporate clients sometimes overpromise. Companies such as Thomas & Betts, Genesis Direct, Ingram Entertainment, Sitel, and AIMS Logistics fell short by hundreds of jobs. Inca Computer and Celcore, which promised 758 jobs between them, are no longer here. Sitel, which promised 1,205 jobs in 1997, is ceasing operations in Memphis.

The 2001 annual report, the most recent available, no longer includes a running total of job commitments. Instead, it lists six companies, including Sitel, that defaulted on their incentives because of underperformance in job creation, based on data submitted as of December 31, 2000, nearly two years ago.

Brian Pecon, director of the Memphis and Shelby County Office of Economic Development (OED), said the process became too cumbersome because of the number of companies involved (approximately 200) and all the name changes and takeovers.

Alarm about Thomson

The dot-com/telecom bust and overbuilding for the likes of Celcore, Sitel, Ingram Entertainment, and Inca Computer have left Memphis and Shelby County with a lot of new empty buildings and warehouses.

To fill some of them up so they can build more new buildings and warehouses, developers want to be able to offer potential occupants like Thomson/Technicolor the same tax incentives on second-generation buildings that they would get if they built a new building.

Thomson claims to have 2,000 employees working at eight different locations in Shelby County, but nobody at OED could cite a basis for that figure, which would make the company one of the top 20 employers in the area. Jobs are notoriously difficult to count. Companies can manipulate them by counting or not counting seasonal, temporary, and staffing-agency employees, depending on whether they are expanding, laying off, or seeking incentives.

Beyond the tantalizing $85 million construction project and 1,262 jobs, everything about Thomson's plans is very hush-hush. Al Andrews, the Memphis representative of Pannatoni, said that even though Thomson is seeking a $9.8 million tax break, "We can't comment on any deal that is not an executed deal." Pecon said he did not even know the identity of Pannatoni's client or the specific building it has in mind. Of course, this diplomacy has not stopped anonymous sources from making all manner of dire predictions in the local business press about the "chilling effect" on industrial real estate and the "devastating" consequences of not amending the PILOT program.

Asked if he could tell city council members more specific information, Andrews said, "In confidence we could."

This led to a bit of farce at last week's city council meeting, where some members had been led to believe the inner city would be the direct beneficiary of tweaking the PILOTs. When word got out that the targeted location is not in the inner city and that the inner city might only be, at best, an indirect beneficiary, a chorus of disbelieving voices was raised.

Following a recess, the proposal was amended to include a January 1, 2003, sunset provision as well as language limiting its scope to Thomson for the time being.

Revisionist History

Backers of tax incentives for Shelby County have called the railroad subsidies of the late 19th century “one of the most successful uses of economic incentives ever conceived.”
Here is historian Samuel Eliot Morison on the railroads on page 763 of The Oxford History of the American People:

“Greatest in power, and most notorious for their abuse of it, were the great railway corporations. The power of an American transcontinental railway over its exclusive territory approached the absolute. … Members of state legislatures were their vassals, to be coerced or bribed into voting ‘right’ if persuasion would not serve. In their opinion, railroading was a private business, no more a fit subject for government regulation than a tailor’s shop. They were unable to recognize any public interest distinct from their own.”

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