Tuesday, November 22, 2005

The Local Tax Problem Won't Be Solved By Putting Band-aids On Gaping Structural Wounds

Soon, we will enter yet another budget season for local government, and once again, there will be the regular hue and cry about the tax rate, bonded indebtedness, fund balances and the need for public sacrifice. But for the first time, there’s hope that local government will finally talk about fixing what’s really wrong -- our broken tax structure.

The dilemma for Memphis and Shelby County is that while new sources of revenue, such as impact fees and adequate facilities taxes, are helpful in balancing budgets, they are only short-term solutions. There is no long-term answer until a new tax structure is created to remove the present inequity and unfairness.

In a studied 51-city analysis released last year by the Office of Revenue Analysis for the District of Columbia Government, Memphis is among the half dozen cities which have the most regressive tax structure. In the meticulously documented report, the analysts looked at the tax burden for the largest city in each of the 50 states and Washington, D.C.

Only a few cities fared worse than Memphis. Our city’s taxes are regressive at their core, meaning that low-income families pay a larger share of their incomes in taxes than high-income families.

That’s because local government has an overreliance on property taxes and sales taxes, when compared to other governments across the U.S. With no real options except the two primary tax sources allowed by state law, city and county governments are left with two inequitable places for more revenues – the regressive sales tax or the regressive property tax.

While local efforts to expand tax sources are well-intended, in the end, the current tax structure is so badly flawed that even new sources are just stopgap answers that don’t address the real inequities in the system.

The 2004 study analyzed the tax burden for families with average incomes of $25,000, $50,000, $75,000, $100,000 and $150,000. The assumptions for the study were that each family has four members and owns a single family home within the city limits.

The average tax burden for the 51 cities across the U.S. was 7.3 percent for families earning $25,000; 8.3 percent for families earning $50,000; 9.1 percent earning $75,000; and 9.2 percent at the $100,000 and $150,000 levels. In other words, most cities have a tax structure that responds to a person’s “ability to pay.”

Memphis does just the opposite. The more a family earns, the less it pays. The family earning $25,000 pays 7.0 percent, right in line with the average for the 51 cities.

But, the family earning $50,000 doesn’t pay more; it pays less – 6.2 percent. A family earning $75,000 pays 6.3 percent, one-third less than the national average; and the $100,000 income family pays 5.9 percent and the family earning $150,000 pays 5.6 percent.

In other words, in the higher income brackets, Memphis taxpayers are paying a smaller percentage of their income in taxes than families making one-fourth as much. These Memphis high-income families are paying roughly 40 per cent less than the average of 51 cities.

Under the heading of tax fairness, the only major cities doing worse than Memphis are Houston, Las Vegas and Jacksonville, and they are only marginally worse. In most of the major cities in the analysis, higher income families paid much more than Memphis. For example, in Louisville, higher income families paid 10.7% of their income in taxes; in Washington, DC, 10.8%; in Portland, 12.7%; in Atlanta, 11.3%; in Baltimore, 11.8%; in Providence, 13.4%; and in New York City, 14.8%.

OK, we admit that at this point, we’re battling with our wonkish tendencies, so let’s try to put as simply as possible: the Memphis tax structure is patently unfair and regressive, and nothing short of building a new one will solve the problem.

Of course, as usual, the political challenge is to see if there is any one with the courage to advance such an idea in an election year. This time, Commissioner John Willingham’s has, introducing his Shelby County Fairness Program as a way to correct present inequities in the tax system.

His plan does it by enacting a payroll tax on every one working in Shelby County, aiming at the about 65,000 people who drive in from outside Shelby County to work here every day.

The goals of his plan, as stated in his proposal, are to:

1) reduce and abolish taxes

2) restore an advantage to taxpayer-owned businesses

3) pay down the county’s debt

4) make Shelby County competitive with its neighbors without issuing more PILOTs

5) provide meaningful financial contributions to state government and the seven municipal governments in Shelby County.

The rewards of reforming the local tax structure is the elimination of the widely hated wheel tax; the lowering of the county property tax by 25 percent; and the elimination of the local option sales tax (reducing the county rate to 7 percent). In addition, the plan calls for a 10-year ban on any tax increases, and sets a high bar for payroll tax increases by allowing them only as a result of public referendum.

It’s a gutsy proposal, coming so close to the election season, but finally, it gets the real tax issue on the table – the need to reinvent the county tax structure.

Commissioner Willingham is a Republican with a strong populist streak, and he’ll need to develop a grassroots way to communicate the proposal to the public. But his toughest audience will probably be his own party, which has gravitated toward the no-tax pledges over the years that have contributed to the county’s catastrophic budgetary picture.

Hopefully, his proposal will encourage serious debate on the critical need for a progressive local tax structure, but most of all, it should make sure that every idea or suggestion is viewed through a single lens: Does it correct the structural tax problem that is a drag on the local economy and an unfair burden on most local taxpayers?


turnerarch said...

While the idea and its fundamental implications are exciting, I won’t believe it until I see it. Call me a pessimist, but I am less than confident in our local government’s ability to enact major changes.
Exactly what are the pitfalls in surrendering the local governments’ charters? We should re-examine the period following the yellow fever epidemic in order to understand the state’s ability to govern a local population.
I recommend that everyone read the essay "Graves and Ghosts: Recovering the Body and Soul of an American City".

MidsouthGambler said...

The "no new taxes" pledges are not what has created our current problem. Our problems have been created by a political hierarchy that thinks that the only solution to our education woes is to throw more money at it. Throwing more money at education never improves it; greater accountability is what improves it. You can raise teaches pay and reduce class sizes all you want, but if nobody is ever accountable for student outcomes, nothing will ever change, and all we'll do is spend more money for more failing grades.

LibertyLarry said...

I certainly won't endorse an OPPRESSIVE income/payroll tax unless the voting system is changed ... I should get one vote for every dollar I pay in taxes (minimum one vote). Maybe then, those of us who would have a portion their income stolen by the local gov't, would have more of voice in how the money is spent.

memphislover said...

I too am excited, both by the continued excellence of SmartCity content and by the wide political spectrum represented here. Looks like lots of different kinds of people read your blog. Love it! Of course we need to reform our tax structure by instituting some kind of payroll / income tax. That is the first step.

If we are going to convince citizens that tax reform is good, we must expand the discussion past the issue of inequity and toward what that reform could buy us.

I would like to see this blog expand the city tax comparison by creating a table that shows the tax burden (% of median income) for the top 10 and bottom 10 metro areas. Include in the body of this table the median income, the % of graduating pupils in that metro area, the $'s spent per pupil, the median teacher income. Do the same thing for such things as the cost of public healthcare, housing cost, $'s spent on infrastructure, etc.

If we don't show people how much better our city could be with tax reform, we won't have a prayer of convincing thinking people with tight fists. And they are precisely the people we need to convince.