An interesting new report from the Tennessee Advisory Commission on Intergovernmental Relations (TACIR) looks at how various tax incentives skew BEP education funding:

When a local government earmarks local sales tax revenues for a sports facility, for example, it has voluntarily diverted school revenues to another purpose. A TIF is a voluntary diversion of property tax revenues to a development project. A property tax abatement results when a public entity voluntarily grants a private entity the use of publicly-owned tax-exempt property.

When property is removed from the county and municipal tax rolls, this diminishes the property tax base, lowers tax capacity, and, in effect, rewards local governments that have voluntarily relinquished revenues that would have gone to public schools had the abatement not been granted. While abatements effected through leases are legal under Tennessee law, officials in counties that have utilized (or over-utilized) them should not be subsidized by excluding the values of abated parcels from their property tax bases.

In 2002, tax abatements were estimated to have cost counties and municipalities approximately $104.3 million in forgone revenues. The loss to county school systems was at least $33 million. The actual total revenue loss was undoubtedly much higher because of under-reporting. The fact is that no one knows the total amount of school revenues that are diverted or abated, and no one knows to what extent the economic benefits of abatements compensate for those losses.

If I read all this correctly, the concern (other than diverting local funds from education) is that counties that use such tax incentives understate their tax base and revenue generating capacity, thus getting a bigger piece of the BEP pie for education than they might otherwise be entitled to.

In their report, which is a follow up to a 2004 report regarding the effects of tax incentives and school funding, TACIR recommends a number of steps to address these concerns. They include improved reporting and oversight of tax incentives, accountability for cost/benefit analysis, and maintaining up to date records used in analyzing the tax base with the goal of leveling the playing field based on comparable information.