It seems like both sides in the controversy about possible appeals by City of Memphis of 200 commercial property tax assessments find themselves with less than winning hands.
On one side, City of Memphis may (it sounds less and less likely) ask the Board of Equalization to seek reassessments of selected commercial property, a move that could potentially raise an estimated $2 million. But at a time when about $35 million in city taxes are being waived through PILOTs issued by EDGE and Center City Revenue Finance Corporation, it’s hard for city government to contend that some businesses should pay more while dozens of others pay next to nothing.
Meanwhile, Memphis businesses have some of the highest commercial taxes in the U.S., and while many business leaders call for lower taxes and more government efficiency, the truth is that the high taxes are the result of one of the most regressive tax structures in the country and the business community has done little over the years to change it.
As a result of that tax structure, City of Memphis – and Shelby County Government, for that matter – is forced to rely on two excessively regressive tax sources – sales taxes and property taxes – which result in most public services here being underfunded when compared to comparable cities.
It’s Expensive to be Poor
That’s what made it especially galling last year for the State of Tennessee Comptroller to lecture city officials about the need to put up about $80 million a year to pay the unfunded liabilities of the city pension system.
Essentially, state government demanded that City of Memphis, already dealing with serious financial challenges as a result of the Great Depression and structural social problems that depress revenues, should pay significantly more to cover pension liabilities and to do it while state government gives city government one of the most regressive tax structures in the U.S. with which to get it done.
In regressive tax structures, equity is upside-down and the pressure is put on the poor. It means that the percentage of income paid in taxes by low-income people is more than people making much more. A study several years ago by the Tennessee Advisory Commission on Intergovernmental Relations concluded that Memphians who earn $25,000 pay 10.8% of their income in taxes; 6.0% if they earn $50,000; 5.8% at $75,000; 4.9% if they earn $100,000, and 4.3% if they earn $150,000.
For perspective, consider that the 4.3% in Memphis for families earning $150,000 compares with the following rates: Philadelphia, 11.1%; Providence, 11.4%; Baltimore, 10.1%; Atlanta, 10.2%; Columbus, 10.2%; Louisville, 10.0%; and Little Rock, 9.2%, according to a report by by the District of Columbia budget offices, that added that the most regressive tax systems are Las Vegas; Sioux Falls, South Dakota, and Memphis.”
Tennessee’s Terrible Tax Structure
If the regressive tax structure provided by the Tennessee Legislature wasn’t bad enough, it is now enshrined in the State Constitution as a result of the referendum spearheaded by Tea Party legislator Brian Kelsey to forbid any consideration of an income tax in the future although income taxes just happens to be the foundation for progressive tax systems.
The Institute on Taxation and Economic Policy’s “Terrible 10 List” for the most regressive tax system ranks Tennessee #6 and concluded that income taxes have little influence on where people choose to live and that states with no income taxes have not created more jobs than others.
So, how well has this regressive tax structure served the long-term interests of Tennessee? Forbes magazine ranks Tennessee 40th among states prepared to compete in the New Economy, Business Insider ranks it #34 among state economies, Pew Charitable Trust ranks Tennessee #44 in jobs growth and #44 in household income, and the state’s GDP growth was among the bottom 10 in the U.S. in a recent report by the Bureau of Economic Analysis.
And yet, we don’t recall any serious business opposition to a constitutional prohibition against an income tax. And that brings us full circle to the City of Memphis’ consideration of property tax assessment appeals as a way to produce new revenues and the high commercial and industrial tax rates in Memphis.
Nothing Is As Easy As It Sounds
While economists agree on very little, there is general agreement that governments aren’t very good at choosing winners and losers, and in some respects, that’s what this controversy feels like. After all, there are dozens and dozens of companies who are only paying 25% of their tax bills because they have received tax waivers through one of our two local PILOT programs.
In essence, the costs of public services for these companies, who have been given tax vacations at the rate of about $80-85 million a year in city and county taxes, have been transferred to other taxpayers, including commercial and industrial property owners. The good news for companies targeted for appeals of their property tax assessments is that for the first time in decades, the City of Memphis Chief Administrative Officer is a businessman, and as a result, Jack Sammons seems to understand that the whole idea needs more thought, or as he put it, “I don’t see us making any aggressive moves on this.”
One company on the appeals list likens the city’s action to a prosecutor appealing an acquittal. “We played by the rules and we went through the proper process and we got our assessment,” he said. “From our point of view, that feels like it should be the end of it.”
That said, if City of Memphis appeals, it is completely within its rights according to state law. City government decided which property assessments to appeal based on the difference between their purchase prices and assessed valuations. A potential legal entanglement is that the city didn’t target all companies that fell into this category but selected which properties to appeal.
Business Cost of a Regressive System
But back to the regressive tax structure, a recent study by the Minnesota Center for Fiscal Excellence shows that commercial and industrial properties pay dearly for Tennessee’s regressive tax system.
Memphis ranks #5 among the 50 largest cities for the highest taxes for $100,000 commercial property; it ranks #4 for highest industrial property valued at $100,000; it ranks #5 for industrial property valued at $1 million; and it ranks #5 for industrial property valued at $25 million. Also, in the ranking of cities with the highest apartment property taxes, Memphis ranks #3.
All in all, doing something about our regressive tax system should be something that brings together the conservative business community and liberal activists. At the end of the day, a regressive tax system punishes the poor and institutionalizes high Memphis and Shelby County tax rates for the foreseeable future.
Unfortunately, we missed our best opportunity in defeating the constitutional amendment banning an income tax that would have kept open the possibility of a progressive tax system, and now, potential solutions will be even harder to find, considering the doctrinaire anti-urban attitudes of our Tea Party Legislature.
Wait, a second, your plan for a more progressive tax structure aims to… lower business taxes!?! At the time when the gap between business and personal wealth, corporate and household balance sheets is at the greatest height of inequality since the 1920’s!?!
CA has a super progressive income tax ranging from 1.25% to 10.55%, depending on income. It also has relatively low property taxes. As a result, its revenues fluctuate highly depending on the business cycle. These income fluctuations are often counter-cyclical to expenses. So in good times, income taxes pour in and expenses grow with revenue; in bad times, income plummets but social service needs rise. The result is a relatively high degree of instability and ever creeping debt. The worst part, however, is that the state also maintains a very non-progressive sales tax of 7.5% in addition to high franchise state taxes and local sales taxes that push rates to 9% in many places.
So CA has high progressive income taxes and high non-progressive sales and other taxes–the worst of both worlds! What do Californians get for all this money that we in TN lack? Nothing! The police are pressed just as thin if not more, the schools are just as bad, and the roads are just as busted. All that Californians get are prison guards who can afford second homes, a vast army of untouchable bureaucrats with enormous pensions, and the mass exodus of middle-class citizens whose population loss is obscured by international immigration.
So it’s expensive to be poor in TN, but it’s expensive to be poor and much, much harder to be middle class in CA. CA can kind of get away with this state of affairs because of unique strengths like Silicon Valley and the weather but also because Nevada and Arizona are wastelands hundreds of miles from main CA population centers. Here in Memphis we have to compete with low tax, family decent Mississippi, which is only minutes from downtown and has already drawn a hundred thousand of Memphians. (People might not leave Manhattan for Jackson, TN in search of lower taxes, but they will to move from Memphis to Desoto County especially if they can keep their jobs and income levels constant.)
So while I’m sympathetic to the plight of the poor, I don’t see how one might shift to a more progressive tax system without incurring more volatility and the ensuing temptations for much higher overall taxes for everyone.
Our current system of providing tax incentives to some but not all businesses is messy, but it’s also good at attracting location flexible businesses while taxing others for essential revenue. Taxing businesses less and people more strikes me as anti-progressive economically and politically. We live at the relative height of corporate power and wealth since the 1920’s. Lacking investment opportunity, businesses are hoarding cash thus furthering inequality. Business taxes put that cash back into circulation.
We believe that a seriously progressive tax structure would spread the burden more evenly, and that would be good for the poor and for business. It’s hard to imagine the lives of the bottom 20% being more difficult than it is here – not enough revenues for a transit system that connects core city workers to job centers, not enough revenues for longer hours for libraries and community centers, etc., incomes of less than $14,000 a year, and on top of that, the requirement to buy a car and to spend a disproportionate share of their incomes on taxes. As we said, the system is upside-down. As for business taxes, the rankings tell the tale – a regressive system is bad for economic opportunity and the economy itself.
Why make CA the comparison just to skew your point. Use a state in this part of the country that has an income tax. Their taxes are fairer because of it. Why are PILOTs being given for distribution jobs in a city with FedEx HQs anyway?
Since it doesn’t sound like there is anything we can do about the referendum that Kelsey way too easily pushed through, what can we do about Edge and their granting PILOTs to every company who requests one, even those who do not provide anything more than a small pool of low wage warehouse jobs? How can we at least get EDGE to require that these companies in turn pay for costs associated with expanding MATA routes to their locales, etc? We are in such a financial crisis in this city and it sounds like we could at least slow down the bleeding if we changed our approach on PILOTs. For comparison’s sake, how many PILOTs do we grant annually compared to the rest of the state and/or to a comparable city?
Imagine a cost of living almost twice that of Memphis, an affordable housing shortage so severe that half of all households spend more than 30% of income on housing and a quarter spend at least 50%, and median household income falling 11% thanks in part to the departure of the middle class for Texas. All in a city with patchy public transportation over a much larger area and you have LA.
http://la.curbed.com/archives/2014/06/los_angeles_has_the_most_people_paying_an_insane_amount_of_their_income_toward_housing.php
With 80,000 homeless per night in a county of 10,000,000, LA has an incidence of homelessness about 4X greater than Memphis. Having lived in Bakersfield during the LAPD crackdown/mass arrests on Skid Row that were only stopped by an ACLU lawsuit, I can assure you that at the very least the bottom 5% have it much better in Memphis than LA. But I’ve also lived in the Northeast and can testify that the poorest 20% areas of Philadelphia and Baltimore are tough. I would be amazed if West Baltimore is much nicer than South Memphis.
I agree that business taxes hurt economic development, probably more so than income taxes. But income taxes are far more detrimental to development than sales and property taxes. Sales taxes are taxes on consumption. They don’t touch producers or workers directly and by discouraging consumer spending, they actually encourage saving. Property taxes are similar with the added benefit that they counteract Federal tax and housing policies like the mortgage deduction that go almost entirely to the wealthy in a way that promotes sprawl.
So if you want economic growth, you’ll favor property, sales, income, and business taxes in that order. If you define “fairness” in a politically progressive way that advocates higher tax rates for the rich, you will favor business, income, sales, and property taxes in that order. These rankings are completely the opposite of each other. Growth and political progressivity are directly opposed. Maybe under communism where capital is evenly distributed among workers, you can cut business taxes in a politically progressive way, but in America, equity in corporations is more concentrated, more unequal, and more stable than income in any year.
Another way to say this is that the tax progressivity of a system applies within tax rates and across kinds of taxes. A city with no income tax but a progressive business tax rates (rich businesses pay a higher rate of tax) might actually be more progressive than one with a progressive income tax and no business taxes. Depending on the numbers and one’s sense of “fairness.” A maximally progressive city would have progressive property tax rates (mansions taxed at a higher rate than shotgun houses), progressive sales taxes (the rich pay a higher sales tax rate or luxury sales taxes apply to lavish goods), progressive income taxes, and progressive business taxes. And the highest business tax rate would be higher than the highest income tax rate would be higher than the highest sales tax rate would be higher than the highest property tax rate.
You claim to have it both ways by shifting property, sales, and business taxes to income taxes. But moving property and sales taxes to income taxes is actually anti-growth. And moving business taxes to individuals is anti-progressive. So your plan is pro-growth and pro-progressive but also anti-growth and anti-progressive. Depending on the numbers, you might increase growth or progressivity, but doing both at once is extremely difficult and probably impossible for a government agency to optimize. As implied by the CA example but also at the Federal level and states across the country, new kinds of taxes typically lead to overall higher taxes. If you were clamoring for the abolishment of property and sales taxes or revenue neutral income tax increases, I might think you had a chance at optimization, but as is, I think you want more total revenue, which means more total taxes. That’s how places like CA ended up with higher income *and* higher business tax rates than TN with comparable sales taxes too. That kind of tax system plays the very rich and very poor against the middle to the detriment of more people than it helps.
Here is an empirical meta-study of some of these issues:
http://taxfoundation.org/article/what-evidence-taxes-and-growth
Comparing CA and TN is really an apples and oranges sort of comparison. CA is so much richer than we are. Median household income in CA in 2014 was $60,287, while only $41,698 in TN. We live in different worlds. Interestingly, TN does do a better job of getting adults educated at the high school level: 83.1% in TN relative to 80.6% in CA. But we are a disaster with higher education, not surprisingly. We have 23.0% of our adults have a Bachelor’s degree, CA is 29.9%. Advanced degrees in TN are 7.9% of adults, while CA is 10.9%.
I do like the observation that progressive income taxes, while highly desirable for redistribution towards equality, do have their little problems during a recession.
We’ve heard of “spot zoning” being illegal. Now we have heard of “spot taxes”. If City appeals the appraisals on these businesses, I too wonder about legality, which you say could be a problem.
We need planning and action for neighborhood betterment so that appraised values go up. We need to change PILOTS back to and improve targeting of industries. The new system proposed by consultant Sharon Younger for EDGE was a whitewash job. PILOT approval should be rare for the most worthy of businesses. Please let the warehouses go to Desoto, Marshall or Fayette Counties. We don’t need any more. Create a few public industrial parks for manufacturing and work with private industrial parks to achieve goals for the type of industries we want.
The City Council should take back its approval power for tax freezes from EDGE. In fact the City Council should exercise greater scrutiny over all the civic elitists out there.