Sales Tax Forecast Is Stormy

The Associated Press report this week that Chattanooga residents are driving to Georgia to escape high sales taxes could just as easily have been written in Memphis, where the implications on the tax base here is more profound and bleaker.

Here, the lure of lower Mississippi sales taxes is strong and with Whitehaven and Southeast Shelby County consumers as close to DeSoto County shopping as stores in their own community, the bleeding will only get worse.

Any doubts about the growing pull of DeSoto County were dashed by the sight of parking lot after parking lot jammed with cars bearing Shelby County license plates during the holiday shopping season. If you wonder why this matters so much, it is the shortfall in sales taxes that is a major contributor to much of Memphis’ current budget debacle.

Here’s the facts: while the sales taxes collected in Shelby County in the last fiscal year rose 2.3 percent, in DeSoto County, sales tax collections climbed 10.5 percent.

The most stunning indication of DeSoto’s growing retail strength is reflected in one statistic -- since 2000, sales tax revenues have grown a remarkable 65.4 percent.

(It also leads us to ask those DeSoto County residents who write letters to the editor to give up their already specious argument that they oppose payroll taxes on their Shelby County salaries on the basis that they shop in Memphis and pay sales tax here.)

Back in Memphis, when you exclude downtown, the rest of the city actually had a decrease in sales taxes. And downtown’s increase in sales tax revenue doesn’t fund city government services anyway, because all sales tax increases are dedicated to paying off the bonds for FedExForum, AutoZone Park and the Memphis Cook Convention Center expansion.

This special earmark of downtown sales tax increases was made through the state legislation allowing cities to create “tourism development zones” in which increased sales taxes can be collected and used to pay for projects that will increase tourism. In effect, it’s a tourism TIF (tax increment financing, which we’ll write more about next week).

The creation of the tourism development zone was a primary component of the financing plan for FedExForum, and the zone includes almost all of downtown Memphis. If it did not exist, the sales tax increases would be split between Memphis city government and the school system. The tourism development zone will remain in place for about 20 years, or until the bonds for the baseball stadium, arena and convention center are paid off.

In other words, the city budget is being squeezed from all directions – DeSoto County sales are up, The Avenue Carriage Crossing shopping center has opened in Collierville (so Memphis will get none of those sales taxes) and no new sales taxes are being contributed to city services from downtown.

Of course, none of this excuses the devastating miscalculations on revenue projections that lie at the heart of city finance problems. But what it says is that while Robert Lipscomb and Roland McElrath have their hands full right now dealing with financial problems, it’s only going to get worse.

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By THE ASSOCIATED PRESS

CHATTANOOGA, Tenn., Dec. 26 (AP) - When Julie Abel goes grocery shopping each week, she drives more than 25 miles to Georgia to avoid paying the nation's highest average tax on food: 8.4 percent in Tennessee.

"If you can save $5, it is worth driving down the road," Ms. Abel said after traveling from her home in rural Hamilton County, which collects 2.22 percent sales tax on food on top of the 6 percent the state collects. Georgia does not tax food sales.

Ms. Abel is not alone in her frustration. State Representative Michael Kernell, Democrat of Memphis, said he regularly heard complaints about the state's food tax, and he predicted it would change.

"A lot of people can't believe it," Mr. Kernell said. "People are leaving the state to buy groceries."

Chris Daly, chairman of Tennesseans for Fair Taxation, wants to end the state's tax on food because, he says, it victimizes low- and middle-income people.

An "average family of four could eat for free from Thanksgiving to Christmas on the tax they pay on food in a year," Mr. Daly said.

A recent report from Mr. Daly's group shows Tennessee leads the nation with the highest average sales tax on food, 8.4 percent, and a 9.4 percent sales tax.

Tennessee is among nine states that either have no state income tax or collect it only on dividend and interest income. Some say a state income tax may help ease the burden of the tax on food, which accounted for $443.1 million, or 4.6 percent of all state taxes collected by the state, in the 2005 fiscal year.

Gov. Phil Bredesen has said that if re-elected next year he will not support a state income tax. Mr. Bredesen's spokeswoman, Lydia Lenker, said the Democratic governor had shown that state government "can operate within its means."

The state finance commissioner, Dave Goetz, said the report that shows the state has the highest average tax on food is no reason to change the tax system.

"The people in Tennessee have been clear they are comfortable with the tax system we have," Mr. Goetz said. "While it may seem high to some, apparently most people don't feel it's a real problem."

Another report by Tennesseans for Fair Taxation shows average sales taxes on food in states that border Tennessee range from no tax in Kentucky to 8 percent in Alabama and Arkansas.

In Alabama, a spokesman for Alabama Arise, an advocacy group for the poor based in Montgomery, said there was an effort to eliminate or at least reduce the tax on food. "We are taxing the poor on the necessities of life, and that is something most states avoid," said Kimble Forrister, director of Alabama Arise.

Carolyn Denison, 71, of suburban Chattanooga, said she frequently drove across the state line to shop but thought Tennesseans would oppose replacing the sales tax on food with an income tax "because they just see it as another tax."