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
Date Written: June 2006
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: Suggested Citation