Wednesday, January 18, 2006

Memphis Tax Structure Becomes Even More Regressive

The latest study of 51 cities – the largest in each state and the District of Columbia – shows that Memphis is moving to the head of the list. Unfortunately, it’s the head of the list of the cities with the most unfair tax structures in the nation.

A few weeks ago, we wrote about the meticulously documented annual survey by the Office of Revenue Analysis for the District of Columbia on the fairness of these representative cities’ tax rates and tax burdens. In the previous year’s index of progressivity (read fairness for those of us not given to economist’s jargon), Memphis had the fourth worst tax structure on the list, with only Cheyenne, Seattle, Sioux Falls and Las Vegas ranked lower than us.

This year, however, we’ve moved even closer to the lead in the dubious category of having the most unfair tax structure. We’ve now leapt over Seattle and are only three places from the bottom. Only Sioux Falls and Las Vegas beat us out on tax inequity.

Evidence of the our current tax structure’s unfairness is stark:

• The average tax burden in Memphis for families of four earning $25,000 is 7.2 percent of their total income.

• For a family earning $50,000, the amount of the income paid in taxes is 6.4 percent, and those with incomes of $75,000 pay 6.5 percent.

• Memphis families earning $100,000 pay 6.1 percent, and remarkably, families earning $150,000 pay the least – 5.8 percent.

Put simply, the tax burden for higher income families is substantially less than families earning only one-sixth as much. In other words, under regressivity in the dictionary, it would say, see Memphis.

In fact, since last year, the percentage of income for the $25,000 family actually edged up .2 percent, while the $150,000 family moved down .2 percent.

By the way, the average tax burden for the 51 cities paints a graphic portrait of our tax structure’s inequities – 7.1 percent at $25,000; 8.3 percent at $50,000; 9.2 percent at $75,000; and 9.3 percent at $100,000 and $150,000. In other words, the amount you pay is based on your ability to pay, a fundamental precept of progressive, or fairest, tax systems.

That’s why the most progressive tax structures don’t tax lower-income, working families at the same rate as wealthy families. Memphis doesn’t even rise to this level playing field, where every one pays the same percentage. Instead, it gives a bonus to the highest-income families by reducing the amount they pay, when compared to lower-income families, by 1.4 percent.

For perspective, consider that the 5.8 percent in Memphis for families earning $150,000 compares with the following rates: Philadelphia, 12.7 percent; Providence, 12.2 percent; Baltimore, 11.8 percent; Atlanta, 11.2 percent; Columbus, 11 percent; Louisville, 10.4 percent; Little Rock, 9.6 percent, and so on.

“The three cities with the least progressive state and local tax systems are Las Vegas, Nevada; Sioux Falls, South Dakota; and Memphis, Tennessee,” concluded the 56-page report. “In Sioux Falls and Memphis, the sales and use tax burden is substantially above the 51-city average.”

In analyzing the tax burden of District of Columbia residents, the report concluded that the problem there happens because the city “does not have the authority to tax nonresident income earned within its borders. Nonresidents earn about 2/3 of all income in the District of Columbia.” While the district’s dilemma is obviously more dramatic than ours, the same principle applies, because about 20 percent of the $2.2 billion earned here is by nonresidents, who pay no part of their income to support the infrastructure that creates the jobs they hold.

The study points out that Memphis has the highest sales tax rate of the 51 cities. Unspoken is the risk attached to this high dependency on sales tax revenues, because, as we learned, a sudden drop in these revenues can wreak havoc on a governmental budget.

What’s all of this mean? It means that until Memphis does something to make income a source of tax revenues, it will continue to be more and more regressive. As it gets more regressive, it will spur more migration out of Memphis, which will stimulate more tax increases, which will produce even more regressivity, and more flight, and so on and so forth.

While there are some ideas being advocated to broaden the source of revenues – such an adequate facilities fees and impact fees – they are only band-aids on a badly wounded tax structure. It is this structure that in the end is the real crisis in Memphis and deserves thoughtful analysis and new policy options for improving it.

Of course, the only thing more challenging than our regressive tax structure is finding someone with the political courage to tackle real tax reform and the restructuring of our entire tax structure.

In the future, we shouldn’t listen to any tax proposals without asking the core question: What is being done to take of the problem, rather than just addressing its symptoms.


BraveCordovaDem said...

I fully agree with some of the ideas in this blog but it leaves out a couple of things. We Memphians are totally dependent upon a remote and unsympathetic State government to give us taxing authority. Just like DC, we have no authorization to tax the incomes of those who work here and use government services for the 40% of the time they spend here, but live outside the City. Now we have giant retail facilities cropping up in Collierville and, even more, in Desoto County, threatening our Tax sales tax base.

The problem is not as much City government at this point (although fiscal management is an issue) but State government. We have little in common with the State of TN and have no real advantage as part of this State.

I would like to know where the other three major cities in TN stand in this survey.

mike said...

Not to tell y'all your business, but here's a couple suggestions to help improve your blog.

1. If you refer back to previous posts, it's often a good idea to provide a link so readers can refresh or folks who missed it can get up to speed.

2. If you refer to another site or a document at another site, it's often a good idea to link to it (like this, for the DC study) so readers can study it for themselves.

Original sources and connectivity are two cornerstones of blogging.

I may disagree with you, but I do like the blog.

Larry said...

It must be nice to view the world thru rose-colored glasses.

Your own figures show that the average tax burden for 51 cities for a family of four earning $25k is 7.1% ... the average for that same family in Memphis is 7.2% ... that amounts to a difference of $25.00 ... yes, just $25!

You want to use that difference of $25 to justify stealing money from the producers in the city. For $25 you want to drive more people, businesses, and jobs from the city by imposing an oppressive payroll/income tax.

Memphis has had to chase people and businesses fleeing increasing taxes, crime, etc. thru annexation ... but guess what. It can't cross the border into Mississippi or Arkansas to tax those businesses there. It can't touch the World Tech Center in Collierville to tax them.

You live under some delusion that people who live outside the city of Memphis never spend money and pay taxes inside the city of Memphis. You live under the delusion that they somehow "owe" Memphis.

Anyone who pays a payroll/income tax to Memphis should get to vote in Memphis elections ... remember that taxation without representation thing? Not only that, but they should get one vote for every dollar they pay in a payroll/income tax!

You liberal elitists are truly the biggest hypocrits.

You don't believe in equality. You somehow believe that one person's success comes at the expense of someone else.

Let me tell you a true story. My father was a union worker at Firestone who had to retire early because of his health ... at that time, I was in junior high. We lived in a two-bedroom house which meant I shared a small bedroom with two brothers. We didn't have money to splurge ... things were tight. My mom kept the neighborhood kids after school for extra money.

I joined the Army to get education benefits, earn a living, and so I wouldn't be burden on my parents. After giving four years of my life to the Army, I returned to college with benefits. Even so, I still needed to work at the FedEx hub at night ... which I did for four years.

After securing a full-time position, I stilled worked a second job for a number of years in order to get myself well grounded.

Now that I have reached a small level of success so that I don't need to work two jobs, you elitist want to steal more of my money thru an income/payroll tax!

I've worked hard and sacrificed a lot to get where I am and you smug elitists want to punish me for by imposing an oppressive income/payroll tax to steal what I earn!

What hypocrits! You don't miss a chance to steal from those who work hard and save. Truly, liberalism is a mental disorder!

Smart City Consulting said...


What you don't seem to grasp is that the families earning $25,000 pay about the same as the average for the 51 cities, but as the earnings increase, so does the percentage of the taxes paid. That's not the case in Memphis.

The more you make, the less you pay. And since I'm making a possibly unfounded value judgement that you're not in the top bracket of income, it's baffling to me that you would argue for a system that taxes you unfairly.

That's the biggest fraud of the tax debates in this nation, because it is the middle class that continues to support tax cuts for the upper incomes, while they get relatively little.

We think you should direct your anger at creating a system that is fairer for you and your children.

Smart City Consulting said...

Oh, by the way, Larry, if you give us your income, we can tell you how much your overall tax burden will decrease with a payroll tax, when its enabling legislation requires the abolition of the wheel tax, a cut of 25 percent in the property tax, the elimination of the entire local option sales tax and a requirement for referendum to change any of the above after a 10 year period when it must remain unchanged.

Please, Larry, think about it. Don't just react to kneejerk namecalling.

BraveCordovaDem said...

"Anyone who pays a payroll/income tax to Memphis should get to vote in Memphis elections ... remember that taxation without representation thing? Not only that, but they should get one vote for every dollar they pay in a payroll/income tax!"

Great Idea Larry! And by the same token, every Memphis resident who purchases items in Collierville, Lakeland, Southaven, Olive Branch, etc. and thus contributes taxes to those towns, should be able to vote in those elections. Lessee, a majority black vote for all of those places.

I am white and not prone to yell "racist," but I have increasingly observed how the leaders of these places love African Americans to spend money there as long as they go back to Memphis to live.

Larry said...

OK, I was grumpy the other day and shouldn't have been so harsh.

Actually, when it comes to federal income taxes, the top 50% pay 96.54% of all income taxes. The top 1% pay more than a third: 34.27%. So it's only "fair" that the largest tax cuts go to those who pay the most.

You have to define "fair".

The 7.2% on $25k comes out to $1,800. The 6.4% on $50k comes out to $3,200. Even by your own numbers, those with more money are paying more. But yet, you want to increase their burden by making them pay even more ... you want to punish them for being successful.

What seems "fair" to me is that we're treated the same with the sales tax. By your logic, I should pay a higher sales tax when I make a purchase simply because my income is higher.

Why do you think that those who make more should pay more for services, that I can arguably assert, they use less?

For example, as a former law enforcement officer, I can tell you that I spent more time in the lower income neighborhoods than the upper incomes neighborhoods.

I think you're dreaming if you think the politicians would give up the elimination of local sales tax options AND the wheel tax AND a 25% reduction in property taxes.

If it were to come to pass, I think you'd see a temporary wheel tax and property tax reduction. I doubt if you'd see a 10 year freeze. I also doubt if they'd give up the power to raise taxes without a public vote (unless written in a new charter). I voted against the wheel tax years ago simply because I knew it wasn't "temporary". At some point in the near future, we'd wind up with the current sales tax, property tax rate, and the payroll/income tax on top of those.

With a sales tax, I have some control. It's not paid until I decided to consume. If I want to invest rather spend, then I'm not taxed.

An income/payroll tax is oppressive and takes that choice away from me. It steals my money before I can do anything with it. I have less to spend and certainly less to save. In fact it discourages savings and encourages consumption.

There are many professionals who make more than $50k who don't own property (they rent) and thus, they wouldn't benefit directly from a property tax reduction.

A point we could probably agree on is I'd like to see the sales tax on food removed. This would address some of your concerns. But I don't see happening on either the state or local level because Tenncare and/or expenses at the Med are rising so quickly.

Bravecordovadem, a sales tax is a consumption tax, thus avoidable by non-residents if they tried hard enough. So they wouldn't get to vote under my idea.

However, property owners can't avoid the property tax ... so every property owner should get to vote whether he/she actually lives in the city or not.

A worker wouldn't be able to avoid a payroll/income tax. So every person who would pay a payroll/income tax should also get to vote in the city.

Thus I would make a change to the city charter that, for the purposes of voting, everyone who lives in the city, OR pays city property taxes, OR pays a city income/payroll tax is eligable to vote in Memphis elections.

Otherwise, it is taxation without representation!

MidsouthGambler said...

As I've posted before, I think many conservatives would support a payroll/income tax if the sales tax and property tax were limited in the constitution/charter. As Larry points out, without such limits, eventuall the "regressive" sales tax will be right back to the level it is at now, on top of the payroll tax.

Smartcity, please make sure to say "the more you make, the less you pay as a percent of your income." Upper income people pay much more in sales taxes than low income, because upper income people buy expensive cars, plasma TVs, fancy furniture, etc., that low income people don't. The sales tax on a LS500 is more than what five low income families pay in a year.

Also, don't forget that a large portion of low income families don't pay any sales tax on food because there is no sales tax on food purchased with food stamps. To say that a sales tax is crushing poor families buying food is somewhat disingenuous.

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