Awhile back, the lede in the New York Times said: “When it comes to taxes closes to home, the less you earn, the harder you’re hit.”
These were the results of an Institute on Taxation and Economic Policy (ITEP) analysis of every state’s tax burden, and Tennessee came in as the 7th most regressive state (which is better than it has been ranked in some other analyses). Regressive tax structure means that the less money you earn, the more of it you pay in taxes.
This may have been news for Times readers, but it should have been old news for any Tennesseean who cares about fair taxation.
According to ITEP, Tennessee’s problems relate to the following:
• No broad-based personal income tax
• Comparatively high reliance on sales taxes
• State sales tax base includes groceries, though taxed at a lower rate
• Local sales tax bases include groceries
• Fails to provide tax credits to low-income taxpayers to offset sales, excise, and property taxes
• Fails to use combined reporting as part of its corporate income tax
Most of all, this should not have been any revelation for Tennessee officials. For many years, the state’s tax system has been considered one of the most unfair and inequitable in the U.S. Faced with this reality, state senators like Brian Kelsey enshrined unfair taxes into the Tennessee Constitution with advocacy of Amendment 3 which now bans the passage of an income tax.
We posted the following a few years ago as one of our commentaries regarding the state’s regressive tax structure:
Here’s the conclusion from a state think tank’s report that will be no surprise to anyone here: Memphians’ taxes are high and inequitable.
It’s the unequivocable conclusion from the Tennessee Advisory Commission on Intergovernmental Relations’ report, “Who Pays More: Local Tax Burdens on Tennessee Households by County.” The report analyzed the tax burden of people in the 19 Tennessee counties with populations of more than 65,000 people.
“The highest effective property tax is found in Shelby County, reflecting the impact of an extremely high property tax rate in Memphis,” the report’s executive summary said. “Memphis has the highest combined county and city nominal tax rate in the state…Total local taxes are regressive, since each of the three taxes (property tax, sales tax and wheel tax) is separately regressive. Regressivity refers to lower income persons paying a higher percent of their income for taxes than do higher income persons.”
And that in a nutshell is the huge obstacle facing Memphis. The high cumulative tax rate drives people, especially the middle class, out of Memphis (and often out of Shelby County altogether) leaving the regressive tax burden to fall even more heavily on low income Memphians.
Memphis’ Problem is Math, Not Mangement
The cumulative city-county tax rate for Memphians is $7.77 per $100 of assessment; in Knoxville, it’s $5.0557; in Chattanooga, it’s $5.0742; and in Nashville/Davidson County, it’s only $4.516.
TACIR reported that the effective property tax rates were lowest in Sevier County at .35% benefiting from its strong tourism industry) to the highest in Shelby County at 1.29%. No other county had an effective tax rate of more than .95% and that was Nashville/Davidson County.
A telling fact in the report is that the tax burden for a family of three in Tennessee’s wealthiest county – Williamson County – pays only $230 more a year. What makes that remarkable is that median value of housing there is $267,700 compared to $118,200 in Shelby County and median household income there is $94,372 annually compared to $54,924 in Shelby County.
Tale Of The Tape
Here’s the tale of the tape on the regressive tax structure of Shelby County:
* Families making $20-29,000 pay 5% of their income in taxes
* Families making $30,000-39,999 pay 4.7%; families making $40,000-49,999 pay 3.2%;
* And remarkably, families making $50,000-69,999 pay 2.8 percent (or 2.2 percent less than families who earn less than a third of their incomes).
Addicted To Regressive Taxes
If there’s any consolation, and this is cold comfort indeed, Shelby County is #3 of Tennessee’s most regressive counties among 95 – behind Williamson County and Nashville/Davidson County.
In its report, TACIR looked at property tax rates, local option sales tax rates and wheel taxes.
The average adjusted property tax rate in Tennessee was $2.337. Shelby County’s is $4.09, the highest in Tennessee.
The average local option sales tax rate in Tennessee is 2.42%. Shelby County’s is 2.25%, while about 35 counties have maxed out at 2.75%.
The average wheel tax among the 55 counties who have them was $35.16, with the highest in Crockett County. Shelby County’s wheel tax is $50 for private cars and $20 for motorcycles.
Band-aids
“In terms of tax burdens, no Tennessee counties are progressive,” the TACIR report concluded. “Williamson County’s local tax burden is the most regressive in Tennessee. Gibson and Hancock Counties have the least regressive tax burdens.”
While local efforts to expand tax sources are well-intended, in the end, the current tax structure is so badly flawed that even new sources are just stopgap solutions that don’t address the fundamental flaws in the system.
TACIR spotlighted this reality with its reliance on the District of Columbia report – “Tax Rates and Tax Burdens in the District of Columbia – A Nationwide Comparison” – that looked at the District and the largest cities in each of the 50 state. The report, which we have frequently cited here, said that families earning $25,000 were ranked 31st in their tax burden among the 51 cities while families earning $100,000 and $150,000 were ranked 46th.
We Can’t See Up From Here
By the way, the average tax burden for the 51 cities paints a graphic portrait of Memphis’ tax structure’s inequities (remember TACIR focused on the entire county) – Memphians who earn $25,000 pay 10.8% of their income in taxes; 6.0% at $50,000; 5.8% at $75,000; 4.9% at $100,000 and 4.3% at $150,000. In other words, the equity of the system is upside-down.
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 . “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 District of Columbia report.
In analyzing the tax burden of District of Columbia residents, a previous 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 here, where 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.
**
Join us at the Smart City Memphis Facebook page for daily articles, reports, and commentaries relevant to Memphis.
The problem with this is once you get progressive taxes, you also get much higher taxes generally for everyone.
Just came back from NJ. Try a roughly 2.5-3.5% property tax by boro plus an income tax from 1.4%-8.97% from $0 to $500k that hits 5.5% by $40k. That’s on top of a 7 PERCENT SALES TAX. Plus, inheritance taxes that can reach 16% in some cases.
It’s pretty similar in NY, CT, and CA. You put that income tax in, and it’s low at first, but next thing you know the prison guars are making $120k, there’s a budget “crisis,” and income tax rates go up and up and up…
Late to Party, Folks who want to discredit progressive taxes generally do like you and use NJ, NY, CT, and CA as examples. I would challenge you to use AR, MO, KY, VA, NC, GA, AL, MS as examples, the states that surround TN. All of them have income taxes. You should use both the taxes and the benefits in comparing. For example, MS is the poorest state but regularly cleans Memphis’ clock in attracting employers due to more flexibility in offering incentives. Granted some of these states are having fiscal problems but those are mainly due to Tea Party governments that cuts taxes before planning how to cut expenses.
Challenge accepted.
Kentucky: Income: $0-2999: 2%; 3k-3999: 3%; 4k-4999: 4%; 5k-8k: 5%; 8-75k: 5.8%; 75k+: 6%; Sales: 6%; Property Average: .72%
Tennessee: Income: zero on wages: Sales: 7%; Property Average: .68%
So, Kentucky has a progressive income tax that makes fine pseudo-distinctions between people earning $2.5k, $3.5k, and $4.5k annually then basically taxes everyone else at 5.9% over 8k. With a slightly lower sales tax and slightly higher property tax. In other words, in Kentucky you pay the same taxes as TN and then a 5.9% income tax forever. And the cost of living is slightly higher. Sounds like a great deal for rich and poor alike.
You can see why I’m skeptical of a long article on taxes that discusses progressiveness at length with almost zero mention of overall tax burdens.
Mississippi cleans our clock in offering incentives for jobs that don’t pay a living wage and are jobs of the past rather than the future. The future is about quality, not cheapness, and we’ve been selling ourselves at a discount for far too long.
Tax revenues have to be tied to improvements in quality of life, workforce, etc., that make us more competitive. That’s the problem with regressive taxes. They are a race to the bottom, based on the mistaken notion that lower taxes creates jobs. The supply side advocates are hard to kill even when faced with the facts.
Many of the states who have higher tax burden have better quality of public services, better quality of life, better workforces, etc, precisely because they have the revenues to invest in them. Compared to them, our tax burdens are ridiculously low, but then again, so is the quality of public services such as higher ed, infrastructure, schools, workforce investment, better neighborhoods, etc.
I don’t think we can say that the high-tax states have the revenues to invest in services as if they have piles of money lying around. Many of these places operate at huge deficits because they’ve made financial commitments to support services that they can’t afford. If it were as simple as ‘raising taxes creates the good life,’ everyone would have done it long before now.
BTW, the last line in your article (“support the infrastructure that creates the jobs they hold.”) is putting the cart before the horse. Infrastructure is only funded from jobs that were created before the infrastructure. Infrastructure can help with jobs, but it doesn’t create them — entrepreneurs create jobs.
Smart City Memphis, let me ask you a question. I’m being 20% argumentative but 80% legitimately scratching my head about this for over a decade:
What are these “improvements, better quality of public services, better quality of life, better workforces,” etc that you mention brought about by higher taxes?
If possible, please, be as concrete and specific as possible. I say that because I have lived for about a decade in NJ and CA, and I never really saw where the higher taxes went. Part of that time I was a student and I’m no government finance expert, so I might have missed it. But when I really stretch myself this is what I can come up with. In NJ, Rutgers is no Princeton or Vanderbilt but it is somewhat better than UT. Part of that comes from drawing on a bigger more cosmopolitan region, but for the sake of argument, I’ll assume that it gets better taxpayer support in ways that pay off in terms of hiring, research, and facilities. NJ public schools are also better for the most part than Memphis ones. And NJ has a pretty good train network especially into NYC. Other than, that I can’t think of anything else, so I’ll assume unless corrected that at least 50% of its bigger taxes go into paying off public employee unions and corrupt officials, unions, and mafia types.
CA seemed even worse. Their parks and the UC systems are clearer better than in Memphis, but the parks aren’t better because of money–they’re better because CA has thousands of miles of beautiful coastline and interesting stuff like redwood forests and mountains. The UC system especially in its heyday is something that I would gladly pay 2%, maybe 3% for in annual income taxes. But it suffers now from fluctuating income tax receipts. Somehow a top rate of 13% isn’t stable enough to cover two flagship research schools in Berkeley and UCLA in a state of nearly 40m people. But where does the other 5-10% of income tax go??? Honestly, I never felt it.
Before you say it helps the CA economy, let me say really? Everyone I knew in the business community not anchored to real estate, Hollywood, the ports, or Silicon Valley had an eye on moving to Texas, Nevada, or Arizona. I get that the didn’t. And I agree with you that people make major location decisions on more than just taxes, but nobody ever said, man we have to stay here in CA because we get such great government goodies from the state. People stayed despite the state. Silicon Valley is in NoCal because of Stanford and huge defense research spending by the Federal government during the middle of the 20th century. Hollywood is in LA because the original film entrepreneurs were fleeing East Coast over regulation (in NJ) and anti-Semitism. And because film shoots need good weather. (And now they’re fleeing to New Orleans for lower taxes).
Where does the money go?
Go to the economic and human capital indicators that matter for cities and regions. The cities with higher taxes generally – not always – perform better than for example most red state cities where conservative supply side legislatures are decimating their abilities to compete. Also, most of the cities that are attracting top talent are cities with high taxes but also offer higher level services. Finally, research shows that the idea that people move out of states because of high taxes isn’t correct.
As for infrastructure, it is just as often built before jobs as to create jobs in the future. In Shelby County, it was built to enrich the developers and there was little to no discussion about creating jobs. The roadbuilding lobby builds roads whether they are needed or not, and they have the political influence to make sure there are always more roads on transportation plans.
In the end, however, we believe that cities that sell themselves on the cheap are the ones that are floundering, and reducing taxes in turn reducing services which regularly reduces success.
PS: Rutgers budget is just under $4 billion. U of M budget is just under $500 million.
Final comment:
CA: spends 41.8% of state budget on K-12 for an average of $9501/student
TN: spends ~42% of state budget on K-12 for an average of $9122/student
http://www.ebudget.ca.gov/FullBudgetSummary.pdf
http://www.tn.gov/assets/entities/finance/budget/attachments/2017BudgetDocumentVol1.pdf
http://www.nea.org/assets/docs/NEA-Rankings-and-Estimates-2013-2014.pdf
CA: total state and local tax burden average: 11%
TN: total state and local tax burden average: 7.3%
http://taxfoundation.org/sites/taxfoundation.org/files/docs/FF16_FINAL.compressed.pdf
In other words, CA taxes its citizens 50.8% more in order to spend 4.1% more per student even though both states spend the same percentage on K-12.
California’s per pupil spending took a nosedive because of Prop 13, and with it, cities around the state are in crisis to fund schools. It’s a cautionary tale about government by proposition.
New Jersey more than $17,000 per pupil and New York more than $19,000. Connecticut more than $16,000. Massachusetts more than $14,000.
Research is showing that poor people who live in cities with higher educational attainment have longer longevity and are healthier.
George,
Infrastructure may not directly create jobs, but entrepreneurs are unable to launch successful ventures without infrastructure. From a historic perspective, infrastructure often preceded job creation. We see time and again where cities near the fall lines of the continent built publicly funded industrial power canals to drive mills that were built only after construction of the power source. Cities incentivized railroads to locate routes through their municipalities in order to attract not just commerce and trade, but large scale industrial operations. Had Memphis International consisted of nothing more than a dirt landing strip, it is hard to imagine Fred Smith relocating his nascent operations here. Silicon Valley’s early days as a hotbed for entrepreneurial activity came about because of existing infrastructure composed of a very reliable power grid and supply network that focused on the South Bay Area, a skilled STEM research bases housed in area universities, plentiful venture capital, steady U.S. Department of Defense spending, and Stanford University leadership.
Entrepreneurs may create jobs, but it is only on rare occasion they create said jobs where the infrastructure is lacking to support the startup and growth of their business model. You would not start a business that is dependent (at least in part) on high speed internet in a place that lacks high speed internet. The web of highways and rail that intersect at Memphis did not follow the city’s evolution into a logistics center, Memphis became a center for distribution due in large part to the highway and rail network coupled with geographic location.
Don’t misunderstand my statement; I said: “Infrastructure is only funded from jobs that were created before the infrastructure.” This helps us keep in mind that prior job creation helps us to get where we want to be. Beyond that, infrastructure is not an “if you build it, they will come” proposition.
Only in part and I believe we are discussing two issues in regards to infrastructure. Often, historically speaking, basic infrastructure improvements have been implemented that were several degrees larger than what a local or even regional population either needed or could support financially. These improvements were often funded by taxation of both local inhabitants as well as distant populations. The existing population west of the Appalachian Mountains hardly justified the need (nor could they possibly fund) the National Road. In this case, while the “jobs” may have existed elsewhere, they were largely nonexistent in the areas that benefited the most from this investment. The “jobs” came later as cities and towns began to grown along the route and only because of the routes existence.
The general principle applies even when the geography is constant. Just as trails, roads, canals and railroads created towns and cities where there were none before, investment in particular kinds of infrastructure can support the creation of types of jobs that would not have been able to exist in a particular location had the infrastructure not been created in the first place. I believe infrastructure is a “if you do not build it, they will not come” proposition.
Speaking of historic precedent: In the 1840s a canal was proposed to be built beginning near present day Shelby Farms and terminating in the vicinity of present day Downtown. This canal was to utilize the fall line that is the bluff to provide power to the Memphis Navy Yard as well as mills and “manufactories” that would have been able to process the natural goods of the farms and plantations of the Delta and hinterlands. Hydro power was a cheap, plentiful and dependable power source for industrial operations. That it might have permitted the city to diversify its economy from a reliance on logistics and shipments of raw goods to a value added economy could have been incredibly transformative.
However, the existing local population was relatively small and was unwilling to support the venture on a local basis alone. Thus the proposal withered and died. It was a risk these early citizens were unwilling to take. Despite a full survey conducted by a civil engineer- Colonel D. Morrison- and an estimated cost that while expensive for the small town was also within the realm of reason, local leaders and citizenry scoffed at the idea of investing tax funds in such a scheme. Meanwhile, cities that did invest in such infrastructure during this time did see rapid industrialization and economic expansion. Would the canal have resulted in a similar outcome in Memphis? We will never know. We can state that NOT investing in infrastructure at the time, in this case an industrial power canal, did not support an increase in entrepreneurial activity and did nothing to diversify the city’s economy which still bears a striking resemblance to that which existed in 1845.
Urbanut: That is fascinating. What else do you know about the canal? Why Shelby Farms? What was there to be connected with?
SCM-
The canal itself would was to serve primarily as a means of power for future industrial operations. The dam that would provide water for the canal was to be located “one and half miles above Stanley’s Ford”, the latter being located approximately 11 miles east of the city which would place the ford in the vicinity of the present day I-40 bridge over the Wolf. The dam would be to the east presumably in the vicinity of the Walnut Grove bridge. The location was chosen because there the Wolf was “confined within high, firm banks, with a smooth, hard bottom”.
The canal would follow something of the existing elevation of the land as it cut its way west eventually parallel to present day Jackson Avenue. The primary outlet would have been at the mouth of the Gayoso Bayou at the Wolf River with a tail-race in association with either the Gayoso or Wolf. The fall and proposed volume of the canal would have been capable of supporting up to “5,840 horse-power”. At the time it was estimated that this would be sufficient to meet the government’s need for 200 horsepower for the proposed navy yard, 200 horsepower for a proposed “Western Armory” and enough left to power “eight pairs of six feet millstones, five hundred thousand spindles for spinning cotton and one hundred power looms” along with “sawmills and various other manufactories”.
The canal appears to have never materialized for several reasons depending on the source and the year it was published. Several factors ring familiar notes. While the city was on a very sound financial footing in the early 1840’s, by the end of that decade civic debt had increased as the government attempted to improve public roads, buildings and services to support the rapidly expanding population. The conservative state government and its limited spending on infrastructure was said to be significantly biased toward the older and more established middle and eastern sections of the state. The federal government failed to fully invest in the Navy Yard- the first “guaranteed” user of canal power- due in large part to deteriorating relationship between northern and southern states.
Thanks, Urbanut. You are always an impressive source of knowledge. This is a fascinating chapter of our history that we didn’t know. Thanks for sharing.