Impact of economic development spending on property tax rate

When I proposed an increased property tax rate last year, one of the arguments against was that the city should stop all the corporate giveaways before thinking about a rate increase.

My response then was that, if we could wave a magic wand and cancel all current economic incentives, we would still need to fix the improperly set tax rate. I didn’t offer evidence beyond that statement. The truth is that I didn’t want to be seen as defending the way Nashville does economic incentives.

As we enter budget season, this same argument is coming up again. This time, I have decided to dip my toes into debating this topic. Before getting to that…I want to be clear. Economic incentive tools are not inherently “good” or “bad.” There is no one right answer. Nashville should offer economic incentives when it helps the city achieve its goals. My objection is not to the idea of incentives.

Incentives should be made according to a policy that is known and agreed upon collectively. Nashville hasn’t done this. Incentives should be measured and graded by consistent standards. Nashville doesn’t do this. Since I’ve been in office, I have tried to create more transparency, more information, and more responsiveness to the public about how incentives are considered and awarded.

Turning toward the budget, the numbers don’t lie. If we immediately undid every existing incentive, it would not be enough to properly fund the Metro government for our growing city. This statement is not a defense of how Nashville sets or executes incentive policy.

At a macro level, the rate adjustment that was needed last year would have generated approximately $150 million per year. Just applying a “feels like” test, I don’t think there is anyone who would argue that Metro spends more than $150 million per year on corporate economic incentives. Yes, killing all incentives would make a dent in $150 million of need. But from even a top level cursory review, it isn’t plausible to argue that eliminating incentives would fix Metro’s budget problem.

Getting in the weeds, I took a quick stab at finding the total impact of economic development on the operating budget. Ignoring all potential benefits to Nashville, and just focusing on the costs, I found about $41 million of impact on the operating budget, which translates to about 13 cents of the property tax rate. You can see my quick, approximate spreadsheet here.

For a $300,000 home, 13 cents of property taxes is about $100. Would anyone want to trade lowering their property taxes by $100 for getting rid of every corporate incentive currently in effect in Nashville? For me, I’d want to explore the benefits side of that equation before I made that deal. It sucks that the city has no agreed upon way to measure and grade economic incentives. But either way, we should be able to agree that eliminating all incentives wouldn’t fully or even mostly fix the improperly set tax rate.

Finally, remember that I am NOT saying that economic incentives cost the city 13 cents of the property tax rate. I am saying that, even if one were to assume that Nashville gets NO benefits whatsoever from these economic incentives, it would translate into about 13 cents of the property tax rate.

Bob Mendes

Bob Mendes represents all of Nashville as a Council-At-Large member of Nashville’s Metro Council. He is Chair of the Council’s Charter Revision Committee, a member of the Metropolitan Audit Committee, and a member of the Council’s Budget & Finance Committee, Rules & Confirmations Committee, and Ad Hoc Affordable Housing Committee. Bob also practices business law at Waypoint Law PLLC. Bob’s complete bio is here. You can follow Bob @mendesbob.