Local Tax Incentives in Action: The Payment-in-Lieu-of-Tax Program in Memphis, Tennessee

Mercatus Policy Comment No. 5

43 Pages Posted: 8 Sep 2008

See all articles by Frederic Sautet

Frederic Sautet

The Catholic University of America (CUA) - Busch School of Business

John Shoaf

affiliation not provided to SSRN

Date Written: June 2006

Abstract

With a heightened focus on job creation, cities are relying on targeted tax incentives to attract businesses. This study considers the characteristics of property tax incentives and examines their effect on growth.

Because of the city's high unemployment, Memphis's Payment-in-Lieu-of-Tax (PILOT) program allows us to evaluate various tax incentive designs. The PILOT reduces the property taxes of select businesses in order to create new jobs and investment. As our analysis causes us to question the effectiveness of the PILOT, after discussing its specifics, analyzing available data, and surveying relevant literature, we suggest alternative policies for improving Memphis's growth prospects.

Economic growth creates jobs; jobs do not create growth. Thus, job creation in itself is not an advisable policy end. Though tax reductions may create jobs, the PILOT allows policymakers to exercise excessive discretion to the detriment of the Memphis area. Rather than allowing market participants to discover opportunities made viable by non-discriminatory tax reductions, citizens expect policymakers to actively create jobs while businesses lobby politicians for favors.

The motivation behind the PILOT is understandable. Fortunately, Memphis can cultivate economic growth via tax reform, either by embracing tax consistency or generality. The former requires that the PILOT program adhere strictly to a coherent system for evaluating PILOT applications, encouraging governments to tax comparable businesses equally and reducing businesses' incentives to lobby for favors. The latter option, though politically difficult, requires policymakers to eliminate the PILOT, streamline governance, and reduce taxation in order to rein in the cost of doing business and promote entrepreneurial discovery.

The lessons of the PILOT program in Memphis are applicable to tax incentive policy elsewhere. The more tax incentives involve officials' discretionary decision making, the less likely they are to produce the benefits of genuine tax reform. Localities that employ targeted tax incentives in an attempt to rectify economic problems should seek to remedy the causes of economic distress by removing barriers to entrepreneurship,rather than trying to steer economic activity.

Keywords: Tax Incentives, Entrepreneurship, Institutions

JEL Classification: H20, M13

Suggested Citation

Sautet, Frederic E. and Shoaf, John, Local Tax Incentives in Action: The Payment-in-Lieu-of-Tax Program in Memphis, Tennessee (June 2006). Mercatus Policy Comment No. 5, Available at SSRN: https://ssrn.com/abstract=1264009

Frederic E. Sautet (Contact Author)

The Catholic University of America (CUA) - Busch School of Business ( email )

Maloney Hall
620 Michigan Ave, NE
Washington, DC 20064
United States

HOME PAGE: http://business.cua.edu/faculty/sautet.cfm

John Shoaf

affiliation not provided to SSRN

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