THE CALCULATIONS IN THIS BLOG CHANGED SLIGHTLY FROM ITS ORIGINAL PUBLICATION
The Regional Input-Output Modeling System (RIMS II), used by EDGE and housed at the Bureau of Economic Analysis, lays out clear guidance on its limitations and use in projecting economic impact. But EDGE has not followed its gudiance for the purpose of abating taxes.
This blog will follow RIMS II guidance to recalculate the EDGE Scorecard. To quickly summarize, the blog finds $200M in excessive job PILOT abatements when using RIMS II. This finding in no way results in the elimination of PILOTs but advocates for PILOT reform to address excess. The blog leaves open the question of how much Memphis might have excess abatements in some 9 other abating boards outside of EDGE.
As part of the FedEx/Memphis Tomorrow entitled spooner complex, the RIMS II system implementation has been botched to afford excessive incentives for the small few. Its stunning that the FedEx/Memphis Tomorrow complex botched the workforce development system while awarding excessive incentives for corporate/real estate interests. But at their very core, the spooners in Memphis feel entitled to feed on a community in need, as other communities propel forward under more responsible community leadership. The basic lie and spooner entitlement underwrites the perennial Memphis decline.
RIMS II LITERATURE
To recalculate the EDGE Scorecard, using RIMS II, adjustments to cost and projected revenue must be made. Prior to this recalculation using RIMS II guidance, this blog has been saying that job incentives are $200M+ in excess when benchmarked against other communities. That assertion is effectively revealed in the recalculation of the EDGE Scorecard using RIMS II guidance.
Cost. First this recalculation accepts the use of RIMS II economic multipliers because when fully following RIMS II guidance the use of multipliers makes sense. RIMS II states:
For important decisions, fiscal impact and economic base studies can be used to complement an economic impact study. These studies estimate the costs of local government services needed to support development projects. These costs include any new spending on public infrastructure or any cash incentives to attract new businesses. More sophisticated fiscal impact studies also consider the expected costs of providing more public services, such as education and public safety, resulting from economic growth.
The fiscal benefits of a project—which include increased revenue from taxes, fees, and user charges—are typically subtracted from the costs of public services to summarize the results of the study. If additional tax information is provided, an I-O model can be used to estimate the expected increases in tax revenue from a project. However, an I-O model cannot be used to conduct a complete fiscal impact analysis.
Abating taxes is an important decision. At the same time, RIMS II guidance clearly states that it alone is not suitable for estimating fiscal impact. Or said another way, RIMS II alone is not suitable for estimating the fiscal impact of abating taxes. EDGE has not been following RIMS II guidance to fully estimate the fiscal impact of abating taxes. The above guidance will be used to recalculate the cost of supporting new jobs in the economy in addition to the actual tax abatement. EDGE only calculates abatement costs when considering tax abatements. This results in an incomplete analysis while paving the way for excessive corporate/real estate tax abatements.
Another note from RIMS II guidance provides this example:
To give an example of how intangible benefits may play a role in the decisionmaking process, consider the case where local officials must decide whether to open a new fire station. An economic impact study may show that the impact of the operation of the station will result in only 10 new jobs. Yet if the local government’s main objective is to increase public safety, this estimate of new jobs will not provide all of the information needed to make the decision.
This note eludes to the need to provide an offset calculation for investing in the local community as opposed to awarding excessive tax incentives to corporations that serve global audiences.
Revenue. This RIMS II case study states the RIMS II does not consider potential offsetting re-employment of the labor and capital upon industry departure but can be used if some idea of re-employment is provided. EDGE assumes in their retention PILOT economic impact studies all new revenue from retention abatements, which in effect assumes that if the employer is not retained in Shelby County, that the entire tax base associated with the economic impact of that company dies.
This is an irresponsible and scandalous assumption which results in inflated revenue for retention PILOTs and the EDGE Scorecard. The EDGE Board should have assumed something beyond death of the entire tax base when considering retention abatements. A responsible assumption will be made that adjusts projected revenue downward for the EDGE Scorecard pertaining to retention PILOTs.
EDGE SCORECARD RECALCULATION
This EDGE Scorecard recalculation does the following while using RIMS II guidance:
- Accounts for public service cost in supporting employed jobs
- Accounts for existing community revenue credit revenue by subtracting if from EDGE claimed revenue
- Accounts for remaining tax base in the event of company departure while assuming a 50% retention rate
Cost Recalculation. Unaccounted cost in the Memphis system to support economic development show up in the form of depleted services in transit, education and public safety. To account for these unaccounted cost, per RIMS II fiscal impact note guidance, we assume it costs $1,000 per year in local government expenditures to support each local job. Our methodologies are disclosed at the end of the blog.
95 EDGE Board approved PILOTS were reviewed. The excessively incented FedEx Downtown project was excluded as it was mostly a Downtown Memphis Commission project. To support 40,272 total direct and indirect jobs, per the 95 PILOTs reviewed, across multiple PILOT terms, the additional cost in addition to the EDGE Scorecard abatement cost of $515M results in an additional system cost to support those jobs of $542M. That results in a total revised EDGE Scorecard cost from $515M to $1.06B.
Revenue Recalculation. Based on the RIMS II case study note, for retention PILOTs, we make a responsible assumption, away from death of the entire entity associated tax base, that 50% of the tax base in existing direct and indirect jobs will be retained upon a company departure. This calculation results in a $398M reduction to EDGE Scorecard revenue from $1.336 to $938M. Next existing taxes found in community revenue credit revenue of $44M is subtracted to result in $894M in recalculated EDGE Scorecard revenue.
EDGE Scorecard Net Recalculation. The final recalculation of the EDGE Scorecard results in $894M in revenue and $1.06B in overall community cost to result in a net deficit of $166M. EDGE claims a $821M gain. The difference between the recalculation and the EDGE claim is ($987)M.
At a minimum, EDGE job incentives are $166M in excess when applying RIMS II guidance for a stagnant breakeven state. This would result in right sized incentive amount of $349M down from EDGE’s $515M for a stagnant state. Or if taxpayers were to make at least as much as EDGE at 5%, it would drop the incentive amount by $359M based on this evaluation from $515M to $156M. Both amounts lead to the conclusion, that EDGE incentives are $200M+ excessive.
CONCLUSION
Service gaps due to excessive incentives are detrimental to both the community and local business. Educating the community about these costs will help right size incentives.
Fiscal impact when abating taxes for economic development is a legislative budget and not a economic development committee issue. If local legislators want to add back in EDGE’s claimed portfolio over performance in more fully evaluating EDGE, that’s fine. But considering that over performance is not fiscally conservative by not considering the business cycle.
The proposed 50% abatement on new capx only and 1% on total wages both provided if current job levels are maintained, while maintaining EDGE investment and term minimums, would right size job PILOTs for the future. Additionally, changes need to be made away from incenting abating boards to represent corporate/real estate interests over the taxpayer. This in itself is scandalous.
In the end, Memphis cannot propel forward on a stack of lies as the entitled elitist feed on a community in need without reliable measurement, legislative and press oversight and independent university thought leadership. Without the former, this is an ecosystem design for decline.
METHODOLOGY
Job Support Costs – Total Memphis/Shelby costs in public safety, $30M total for transit and K-12 education were totaled to be $1.05B and divided by 2 resulting in a total public spend of $525M to support jobs in the local economy based on a 50% employed population. The $525M was then divided by 500K employed jobs in the local economy to arrive at a cost $1,050 in cost per job. $1,000 was used in the study.
Revenue Adjustment – Retention PILOTs revenue was adjusted downward based on the assumption that the entire tax base does not die upon a company departure while assuming 50% of the tax base would be retained in the event of a corporate departure. When companies depart, they typically take 30% or less of their workers. Assuming a 50% retained tax base upon a company departure, would assume a 30% negative impact to the remaining tax base upon a company departure.