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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.