Monday, December 19, 2005

Trends Call For Long-Term Tax Solutions

The more that you scratch the surface, the clearer it seems that an adequate facilities tax or impact fee is not the answer to Shelby County Government’s financial woes.

The real answer seems to lie in a tax proposal that works within today’s realities.

A few trends to consider:

• Shelby County continues to lose income to neighboring counties -- $238.2 million in just two years (2001-2002).

• The number of people working in Shelby County, but living in neighboring counties continues to swell – now more than 88,000.

• A bulge in the 5-13 year-old portion of county population is the largest in 20 years, an early warning that more money will be needed in the future for schools.

• The Shelby County poverty rate hangs at about 16 percent, the highest of our “peer cities.”

• The total wages for jobs paid to people who work in Shelby County continue to grow at more than 3 percent a year – now $20.1 billion.

These facts seem to indicate that the energy and political capital needed to pass development taxes could be better spent on a long-term structural change in taxes. Put simply, with more people and income moving to neighboring counties, until local government devises a way to attach that income, development taxes are only putting off the inevitable.

Shelby County Mayor A C Wharton knows the results of short-sighted, political decision-making. The current budget mess is not of his making, but no-tax pledges in the past and bond payment schedules that deliberately shoved massive payments into the Wharton Administration make it his to solve.

Based on the budget mess dumped in their laps, current county officials should understand the challenge of making decisions that stand the test of time. The best course of action would be to take the time to carefully analyze the trends that are defining Shelby County’s future and set tax policies within that realistic framework.

At a time when both Memphis and Shelby County Governments have a historical overdependence on property owners for taxes, the current proposals for development taxes return yet again to property as the source for new revenues.

More importantly to the need for long-range answers, however, is the stark reality of the bond payments inherited by current county officials. Within months, the yearly bond payments for the county’s suffocating debt will reach an unimaginable $200 million a year. The proposed development fees would produce about $10-15 million.

That’s why even if the development fees were passed, county government will have to consider another tax increase next year to pay the bill that’s come due on its bond debt. In one of the most cynical examples of political gamesmanship in local politics, the Rout Administration found it hard to say no to any capital project during its eight years in office but found it impossible to say yes to paying for it on its own watch. Instead, as the county debt climbed, the Rout Administration made token payments on it while deciding to shove out the higher payments so the next administration would have to handle the political downside of dealing with it.

In the end, the size of the debt and the payments for them demand a change in our tax structure. Rather than adding new taxes onto an existing, highly regressive structure, we need ways to enlarge the pool of people paying taxes. Nothing demonstrates the wisdom of this approach as much as these facts: about 60 percent of Fayette County workers, 52 percent of Tipton County workers, 34 percent of Marshall County workers, 33 percent of Crittenden County workers and 21 percent of Tate County workers earn their livings at jobs in Shelby County.

In other words, about 62,000 people from counties in the Memphis MSA drive across the Shelby County line to work. But, add to that the 26,000 workers who drive in from counties which aren’t in our MSA, and it creates a pool of potential taxpayers of 88,000, and serious solutions to Shelby County’s tax problems should be aimed at them.

This means that roughly one in every five workers holding jobs in Shelby County don’t live here, benefiting from employment opportunities here, enjoying the amenities here and driving back across the county line to live. A number of counties across the U.S. have developed regional tax-sharing programs in support of cultural and arts attractions or for economic development, but the presence of two state lines make the prospects of such innovations highly unlikely here, because such revenue-sharing plans would require legislative action by three different states.

A payroll tax achieves the same results, but without approval by Mississippi and Arkansas. In the past, city government, notably former Council Member Janet Hooks, was a dependable advocate for the payroll tax, and these days, County Commissioner John Willingham is a relentless crusader for it. They receive supportive words from some elected officials, who do it quietly and behind the scenes (normally, way behind the scenes).

Perhaps, faced with a dramatic budgetary crisis that resists any simple solutions, elected officials can join hands to take a comprehensive look at structural tax reform that would reduce the overall tax burden on county taxpayers. In the end, however, it's hard to identify a tax option that offers the benefits of a payroll tax, chief among them, in addressing the most pressing problem facing our community – the financial disincentive to live here.

With a payroll tax, according to the only proposal on the table, Shelby County could reduce its property tax rate; it could eliminate the local option of the sales tax, leaving only the state portion of 7 percent; it could eliminate the much-hated wheel tax, and it could still generate enough revenues to make significant payments on the county bonded indebtedness.

We live in a tax adverse society, but in the end, there will always be taxes. The charge for our elected officials is to make sure that taxes are fairer, more coherent and more balanced. That’s the first conversation that county elected officials should have, and after it, they should announce what tax proposal they are pursuing.


Mick Wright said...

Just a few things to note:

1. payroll taxes are unconstitutional in Tennesse

2. out-of-town workers aren't simply piglets sucking on the public nipple. They also contribute to the city in the form of sales taxes, not to mention via the activity known as "work," which benefits Memphians both directly and indirectly.

3. taxes may be a way of life, but so is government spending, and the two must be in check. so long as Memphis' political class is crooked and incompetent, I find it unwise to offer them another source of revenue to exploit.

Other than that, great post.

Smart City Consulting said...

1) There is the possibility that a payroll tax can be enacted by the state legislature, and that should be pursued.
2) The sales taxes paid by workers in Shelby County hardly begin to scratch the surface of the local costs of the infrastructure and amenities they enjoy here.
3) If you believe that the political class is crooked and incompetent, you should support a payroll tax, because it would limit their abilities to pass tax increases. You might want to read the earlier blog post about Shelby County's ranking as one of the most regressive tax structures in the country.

Brad Watkins said...

Thank you.

Mick Wright said...

1. legislative action wouldn't suddenly make a payroll tax constitutional, unless by that you mean the legislature would be amending the state's constitution.

2. if they all suddenly quit, would Memphis be better or worse off?

3. i fail to see how adding an additional tax category to the city's repertoire would limit the city's ability to increase taxes, rather than expand its reach. enlighten me.

Smart City Consulting said...

1) There are differing legal opinions on whether the Legislature can enact a bill (without Constitutional amendment) that treats a payroll tax as a privilege tax on employment. We contend that we need to resolve this once and for all with action by the legislature.

2)If the 88,000 people who work in Shelby County but live in other counties would suddenly quit their jobs, they'd be out of work. There's a reason they're not working in their home county. It's Shelby County that is the economic generator for the region. It's the center of employment, of culture, of entertainment, and all things that make it attractive for these people to live in adjoining counties in the first place.

3) The proposal for a payroll tax that is floating around the community would require cuts in the sales tax rate, elimination of the wheel tax and reduction of the county tax rate by more than $1.00. A referendum of the public would be needed before a wheel tax could be reenacted or the sales tax increased or the payroll tax rate increased. That seems unlikely to happen, so the total restructuring of the county tax structure - which is the only answer to one of the most regressive and unfair in the U.S., which we now have - will solve out tax challenges. Without changes in the tax structure, residents of Shelby County will have higher and higher property taxes.

Thanks for the questions and the discussion.

eat said...

Carol - I agree that the tax system needs to be totally restructured. But why should we not pursue development taxes or fees as well? It's not just about how much $$ they would generate, but whether or not it is fair to have all taxpayers subsidize the costs of new suburban development.

Smart City Consulting said...

It's our feeling that pursuing development fees diverts energy that should be spent on the fundamental changes needed in our tax structure. If there are to be development fees, it seems that they should be built on a reformed tax structure, not on the one we have now.

Larry said...

I know I'm dealing with left-wing idealogues here ... but, IMO, an income/payroll tax is the most evil of taxes.

In order to make things a little "fairer" if an income/payroll tax is implemented, I should get one vote for every dollar I pay in income/payroll tax! And anyone who pays it should get a vote whether they live in the city or not! (It's that taxation without representation thing.) Until that is part of the reform package, you can bet I will oppose any imposition of an oppressive income/payroll tax.

Bill Hobbs said...

Some of the same people in the legislature who are pushing to let Memphis and other cities have a payroll tax are also pushing to abolish the right Tennesseans now have to kill wheel tax increases via referendum.

I have a long post on the constitutionality of the income tax here:

Smart City Consulting said...

Larry, thanks for the compliment. It it weren't for liberal revolutionaries, we'd still be singing, "God Save The Queen." That said, economists of all political stripes agree that income taxes are the most progressive, and as we've previously reported, Memphis has one of the most regressive tax structures in the country.

Anonymous said...

"Some of the same people in the legislature who are pushing to let Memphis and other cities have a payroll tax are also pushing to abolish the right Tennesseans now have to kill wheel tax increases via referendum."

Of course. Most conservative politicians aren't against taxes... they're against rich people paying them.