A Commuter Tax for Memphis

Transcription

1 A Commuter Tax for Memphis PADM 7140 Summer 2010 Michael J. Higgs 7/5/2010

2 Background As we have learned on our Governmental Budgeting and Finance course, property taxes and sales taxes are the major sources of revenues at the local level of government (Bland 2007, 37). Current economic conditions are having a strongly negative impact on those revenue sources. In its City Fiscal Conditions in 2008 report, the National League of Cities (NLC) found that in 2008 sales tax collections had declined by 4.2% and property taxes by 3.6% compared to 2007(Brock 2008,1). Similarly, in its 2009 report, NLC cited city finance officers predicting no growth or further declines in these taxes in 2009 (Hoene and Pagano 2009, 4). Furthermore, due to the cycles of tax assessments and revenue collections for property taxes, there is a time lag between the point a change in economic conditions occurs and the appearance of its impact on tax collections (Hoene and Pagano 2009, 8). Due to this lag, the effects of the increased numbers of foreclosures and their downward pressure on the assessed values on property will not likely be seen until the 2010 and 2011 tax years (Hoene and Pagano 2009, 7). Like many cities, Memphis is under considerable duress in its effort to finance its operations. Rising expenses and a diminishing tax base are challenging the city s viability. Memphis is a city of 671,000, anchoring a Metropolitan Statistical Area (MSA) of 1.2 million. According to the 2000 census data, 17.2 % of Memphians live below the poverty level, and the median income was $32,285. The city is limited in its ability to grow. It is bounded by the Mississippi river to the west, the state of Mississippi to the south and is ringed by a number of smaller cities to the north, northeast and southeast. It has only a narrow corridor on its eastern border that permits further growth. Like many cities, it has seen an erosion of its tax base as citizens moved outward to suburbs and nearby cities with lower tax rates and other attractions like better school systems. For the past two decades the city s response has been to annex 1

3 contiguous portions of the surrounding Shelby County to expand its tax base and recapture some of its taxpayers. While this has helped slow the decrease in tax revenues, it does not come without costs. Immediately upon annexation the city must extend its police and fire coverage and shortly thereafter is expected to provide infrastructure improvements like sidewalks, street lights and community centers. Like all cities and counties, Memphis struggles to find the right level of taxation to support its citizens without creating a burden that further encourages flight. The city council is sensitive to the significant portion of the populace that lives in poverty and to the elderly who live on fixed incomes. Both groups are very susceptible to property tax increases. The city s local option sales tax, on top of the state tax, pushes the taxes on goods purchased in the city to 9.25%, which also weighs heavily on these citizens. Concept Discussion Aside from property taxes and sales taxes, there is another option the city could explore to generate additional revenues that is currently used in Philadelphia, Houston, Minneapolis, and New York City; a city wage tax. The concept of a wage tax is based upon the fact that there are people who commute into the city from the surrounding areas who are consuming the public goods produced by the city, especially police and fire protection, without bearing an appropriate portion of the cost. This imposes an unfair burden on the citizens of Memphis, whose infrastructure and services support the businesses which provide the livelihoods of thousands of non-residents. A city wage tax, sometimes called a commuter tax, is generally a flat tax imposed on all those who work within the levying municipality. There are generally no exclusions or exemptions to the tax (Brunori 2007, 88). This concept first surfaced locally in a proposal to the Shelby County Commission in The county briefly considered imposing a wage tax, which was referred to as a privilege tax, on all those who are employed within its boundaries. The 2

4 original proposal called for an $8 per month tax on all those making in excess of $28,000. At that time there were approximately 619,540 workers in the county and 252,875 met the minimum income requirement. Of those eligible, 113,790 employees lived outside of the county, with over 52,000 being residents of Mississippi or Arkansas. Taxing only this group of non-residents would have generated over $10.9 million in revenues per year. Memphis would not be the first city to tax out-of-state residents. Many of those paying New York and Philadelphia taxes reside in the nearby states of New Jersey, Connecticut, and Delaware, respectively. In fact, the state of Oregon currently taxes a small number of federal employees who reside in Washington and work in a specific facility in Oregon. This wage tax would be a form of tax exportation, which is shifting a revenue generation mechanism from residents to non-residents, which makes it appealing to some, but does not come without risk. In some cases creating this form of local option income tax can create a fiscal disparity between local jurisdictions which can further economically motivated migration of citizens or businesses (Brunori 2007, 88). In this case, Memphis would have an advantage over other potential users of this tax. There is no state income tax on earned income in Tennessee, which means the city would not be competing with the state for this tax base. However, it could limit the state s flexibility in the future, should a state income tax be enacted. According to Brunori, two levels of government taxing the same tax base can result in a tax rate that is inefficiently large (2007, 89). Implementing this form of tax in Tennessee requires approval of the state legislature and while state income taxes have been discuss often and at length without approval, the creation of such a tax is still a possibility in the future. Given this possibility, the state might be very reluctant to give up any flexibility for imposing this tax in order for Memphis to impose a wage tax. Another negative political factor in gaining approval for this tax is that it is a 3

5 regressive tax. This means that, although the tax envisioned is small, it represents a larger percentage of the income of the poorer taxpayers compared to its impact on the wealthier taxpayers (Brunori 2007, 75). Such taxes are generally politically unpalatable. A study by Robert Inman shows that high city taxes, without compensating service benefits, tend to drive out taxpayers and businesses and drive down city property values( 2003, 27). At present Memphis has no large-scale service improvement project, such as light rail transportation construction, that it could promote as a justification for such a new tax. However, from a planning standpoint, there are aspects of the city which could be promoted as an offset to the increase in taxes. These aspects are called agglomeration economies. These are cost advantages which occur when firms, retail stores, or cultural activities are concentrated in common and usually small geographic areas (Inman 2003, 25). In Memphis these economies, to name a few, are found in healthcare; with thirteen hospitals in the area including St Jude Children s Research Hospital; entertainment, with the Beal Street entertainment district and the NBA Grizzlies; and in business, with the headquarters of firms such as FedEx, International Paper and AutoZone located here. Conclusion The implementation of a commuter or privilege tax on non-residents working in Memphis is an option that bears further study. Such a tax can be appealing as it is relatively simple to implement, with collections conducted by the employers, and it has the potential to make a significant contribution to the revenues of the city, with no direct burden on the city residents themselves. This makes the tax highly attractive to local politicians and may be supported on the basis of fairness and sharing the burden of providing the infrastructure which 4

6 provides business opportunities, quality healthcare, and cultural benefits to the surrounding region. However, there is also potential for considerable backlash to what some might see as the un-american nature of the tax. Specifically, many of those who would be subject to the tax do not have representation either within the political body seeking to tax them or the body with the authority to approve the taxation. Accordingly, an in-depth analysis must be done on both the political and economic costs and benefits of such a tax. The analysis must take into account the long-standing resistance to income taxes within Tennessee, possible retaliatory tax increases by other nearby municipalities or adjoining states, and possible negative consequences on affected businesses, which may feel pressure to raise wages in response to this tax. All in all, this tax presents both an interesting opportunity and a collection of significant challenges for any municipality considering its use. 5

7 Bibliography American City and County NLC Survey: Cities Financial Distress Will Continue Beyond /index.html (June 30, 2010). Bland, Robert L A Budgeting Guide for Local Government. 2 nd ed. Washington, DC: The International City/County Management Association. Brock, Edward Economic Downturn Stifles City Budgets. ets_1108/index.html (June 30, 2010). Brunori, David Local Tax Policy: A Federalist Perspective. 2 nd ed. Washington, DC: The Urban Institute Press. Doniach, Alex Wharton Tax Plan Gets Sour Reception: Wants all Workers in County to Pay; Commissioners Uneasy. Memphis (TN) Commercial Appeal, 3 January. Doniach, Alex Privilege Tax Back in Shelby County Plan. Memphis (TN) Commercial Appeal, April 15. Gillette, Clayton P Who Should Authorize a Commuter Tax? University of Chicago Law Review 77 (1): Hoene, Christopher W., and Michael A. Pagano City Fiscal Conditions in Research Brief on America s Cities 2 (September): House Keeps Commuter Tax in Oregon Human Events 52 (42): 23. 6

8 Inman, Robert P Should Philadelphia s Suburbs Help Their Central City? Business Review Federal Reserve Bank of Philadelphia Quarter 2: