November 10, 2006

Fear and Loathing in Memphis

Just as I predicted, the passage of a new amendment to Nashville's city charter giving voters the right to approve or reject property tax increases via referendum is already raising interest across the state. Friday's Memphis Commercial Appeal has a rather long and overheated editorial opposing the concept and trying to scare Memphians away from trying to pass a similar amendment to Memphis' city charter.

This week voters in Metro Nashville passed a referendum that will require voters in Metro Nashville to approve any new property tax rate increase from this day forward.

In Metro Nashville, time will tell what the effects will be. The head of the local firefighters' union has expressed some concern about public safety. A national bond rating agency has warned that Nashville's bond rating may fall.

There seems little question that there will be attempts to find a way to prevent the city from running into serious budgetary problems. A move for a local payroll tax may not be far behind.

As I explained in detail here in June 2005, in a response to a Tennessean editorial (no longer online) calling for creation of a 1 percent payroll tax in Nashville, the state constitution expressly prohibits cities and counties from levying income taxes. A payroll tax is an income tax.

Article 11, Section 9 of the state constitution says this:

The General Assembly shall not authorize any municipality to tax incomes, estates, or inheritances, or to impose any other tax not authorized by Sections 28 or 29 of Article 2 of this constitution.

So, do Sections 28 or 29 of Article 2 of the state constitution authorize an income tax?

No. Article 2, Sections 28-29 lists the things the legislature may tax. An income tax is not listed. While some politicians and lawyers - mainly those who believe Tennessee needs a statewide income tax -argue that Article 2, Sections 28-29 does not specifically forbid an income tax, and therefore one is permissible, that is a losing argument.

Article 11, Section 9 makes it clear that if something is not on the list of things the legislature is authorized to tax, then the legislature "is "not authorized" to tax it - and may not authorize cities and counties to tax it.

A payroll tax, therefore, is unconstitutional at the state level and also at the city and county level.

Having mislead readers about the spectre of a payroll tax - odd, since the Commercial-Appeal endorsed a proposed to create a payroll tax in Memphis two years ago - the C-A editorial continues with its editorial:

Could Memphis be next? There is no shortage of people here who are ready to revolt against taxes, too. But experimenting with the city's revenue system, which could hardly be regarded as stable, seems risky.

One thing it would accomplish would be to paint a picture of Memphis - in case anyone out there is thinking about moving a business here - as a community where the local political leadership lacks the authority to respond adequately to emergencies.

Public discourse would primarily center on the topic of what public services to cut next and where new sources of revenue might be found. Property tax bills would continue to rise with each new property reassessment, for those properties that increased in value. But it would still be difficult to keep up with inflation, even with reassessment, without nickle-and-diming citizens to death with an array of new service fees or alternative taxes. Never mind initiatives designed to respond to urgent public needs.

All the scaremongering over the Nashville property tax charter amendment is actually rather silly when you realize the charter amendment is not all that tough on tax increases. The amendment merely caps the tax rate at its existing rate without voter approval. But every four years the government reassesses all property in the city, and then lowers the tax rate so that the higher assessments will not generate more revenue, a step mandated by state law.

If the existing tax rate was $4. and if all the property that existed four years ago increased in value by an average of 25 percent since the last reassessment, then the existing tax rate would be lowered to $3. That is so that - on average - the reassessment on properties that existed at the last reassessment would be revenue-neutral. Under the Nashville charter amendment, the Metro Council could then raise the tax rate back to $4 without triggering the referendum requirement.

In other words, the new Metro Charter amendment not only allows city government to reap increased revenue from increased property values and new development, it even allows for some tax-rate increases, while giving the people a role in accepting or rejecting larger tax-rate increases.

Update: Memphis blogger John Harvey has a good response to the C-A's editorial. Harvey looks to be the Memphian stepping up to lead an effort for a similar charter amendment there.

I wonder who will step up to lead the fight in Knoxville, Chattanooga, Clarksville, Jackson, Murfreesboro, Cookeville, Bristol, Cleveland, Brentwood and beyond...