Lucrative Tax and Incentive Deals for For-Profits in Tennessee

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August 14, 2011; Source: The Tennessean | There is much debate over the value of tax revenues that are lost to municipal, county or state coffers due to nonprofit tax exemptions. But how do they compare to the tax incentives and abatements offered to for-profit companies? On Sunday The Tennessean published two articles providing a glimpse at some of the government incentives for businesses in Middle Tennessee. They certainly raise the question of how much localities are giving away to for-profits for relatively little benefit.

In Nashville, for example, the Metro / Davidson County government struck a deal for an 800-room Omni Hotel to be built next to the Music City Center convention complex. The package of incentives includes $245.5 million in payments to Omni over 20 years (drawn from excess tourism taxes generated by the convention center complex), plus $25 million to finance the Omni’s land acquisition costs, and a 62.5 percent reduction in the hotel’s property taxes.

Southeast of Nashville, Rutherford County’s industrial development board has given five projects personal-property and real estate tax abatements for between five and ten years. Officials can’t put a dollar value on them since they are based on future tax values and rates.

Neighboring Williamson County issued $112 million in tax-exempt revenue bonds to help finance acquisition and construction costs for the new corporate headquarters of Community Health Systems, Healthways, and Jackson National Life Insurance. The county used the proceeds from the bond issue to take ownership of the buildings—making them tax-exempt—and now leases the buildings back to the corporations, with the lease payments used to repay the bonds. The county was nice enough to add a tax abatement to the deal, allowing the corporations to make payments in lieu of taxes or pay a reduced property tax rate.

The Tennesseean reports that the for-profit companies in these deals all “pledge” to create some hundreds if not thousands of new jobs, but what happens if these plans don’t come to fruition? Has the local government simply given away a package of valuable incentives with no way to ensure a comparable benefit to the local economy? Would the companies perhaps have built or located in these counties even without some or all of the generous tax breaks? 

Some localities insert “clawback” provisions into some deals in case the companies fail to deliver on their pledges, but one suspects that clawbacks appear more frequently in the academic literature than in real life. Localities hoping to attract businesses with incentives usually don’t know who they’re competing against, so they often lack leverage to impose clawbacks.

The Tennessean could only provide information on ten projects for which they could get reasonably complete economic data. That isn’t surprising. According to the paper, the Washington, D.C.–based organization Good Jobs First “recently gave Tennessee and 12 other states an ‘F’ for poor disclosure of incentives information that it said keeps the public in the dark.” As it justifies its own tax-exempt status, the nonprofit sector needs to collect more information about local tax breaks and incentives for for-profit companies and use that data to hold local governments accountable.—Rick Cohen