Taxing Situation Faces Public

Nothing is quite as confusing as government financing, and that’s never been truer than now.

There seems to be big numbers every where – the $30 million for The Pyramid, there’s the idea of a new convention center likely to cost at least $500 million, there’s the tens of millions of dollars for Liberty Bowl Stadium improvements, and then, there’s the $66 million cut in funding for Memphis City Schools.

There are times when even insiders in government get confused by the blizzard of numbers, funding sources, legal restrictions and potential uses. That’s why it’s easy to understand why the Letters to the Editor use operating and capital amounts as if they are interchangeable or that money for The Pyramid could be spent on schools instead.

Of course, they can’t be.

Here A Tax, There A Tax

There are property taxes that are paid by all Memphians who own property. Memphis has the highest cumulative city-county tax burden in the state, and both city and county governments have heavy dependency on property taxes, which fund the majority of city and county services (half of the county’s property taxes go to schools).

There are sales taxes collected every time we make a purchase in Memphis – 7% of it goes directly to Nashville and the 2.25% local option sales tax stays here. Half of the local option sales tax goes to the general fund of city government and the other half goes to public education.  Outside Memphis, the local sales tax goes to either a town or county government, depending on the location of the purchase.

There are the hotel-motel taxes that are added to the bills for rooms in Memphis hotels. Shelby County Government has a hotel-motel tax of 5% and City of Memphis has a hotel-motel tax of 1.7%. They are used to fund the Memphis Convention and Visitors Bureau and to pay off the bonds on the Memphis Cook Convention Center.

Alphabet Soup

There’s the Tourism Development Zone (TDZ) which takes in most of downtown. In this district, the incremental increase in state sales taxes created by a tourism-oriented project is collected and used to pay off bonds issued for that project. Some TDZ’s collect all of the state sales tax while others can only collect 45% (excluding the portion for public education). Another TDZ is likely to be created to fund infrastructure improvements for the Fairgrounds mixed-use development and improvements for the Graceland area.

There’s Tax Increment Financing (TIF) which collects increases in city and county property taxes that take place following infrastructure improvements in a specified area. A baseline is set and anything above that baseline can be captured to pay for public improvements. Uptown is largely funded by a TIF district.  This is a financing mechanism used successfully in Nashville as a key incentive.

There’s the Payment-in-lieu-of-taxes (PILOT) program that freezes property taxes at the amount of the unimproved property, and as the property is improved and its value increases, it pays the taxes on the unimproved property.  Memphis and Shelby County have handed out more tax freezes than all metropolitan areas of Tennessee combined. PILOT’s are granted by the Industrial Development Board for new businesses and expansions and the Center City Revenue Finance Corporation for downtown projects.  There are about $50 million in taxes waived in city and county governments this year.

And There’s More

There’s the Center City Commission’s PILOT extension fund that pays for bonds issued for parking facilities.

There’s the state sales tax rebate that collects the sales taxes from the sale of tickets, concessions and merchandise at the games of professional sports teams. This funding was used at FedEx Forum and Autozone Park.

There’s the special rental car tax for vehicles rented at the airport and its proceeds are designated for FedExForum.

And these are just a few of the taxes collected and spent by our governments. Some taxes can only be spent for specific things – such as a convention center, an arena or street improvements. As a result, they are not interchangeable, but they often allow projects to proceed without property taxes.

Pyramid Scheme

As a result, we pity the average citizen as they try to sort through all of this and argue that the $30 million being spent at The Pyramid should be given to Memphis City Schools to make up part of the $66 million cut.

The same sort of argument was heard when the FedEx Forum was approved, but the truth is that the taxes being used to pay for both of these projects can’t be spent on education. By law, they can only be spent for specific projects like a public tourism-related facility or a professional sports team.

Even if they wanted, city and county governments could not legally redirect revenues paying for The Pyramid or FedExForum to schools, whose capital funding is paid from property taxes.

Confusion Reigns

Or said another way, even if the state law did allow this money to be redirected, it would not be $30 million sent to schools. It would be $2.4 million. That’s because the annual payment on the bonds is about $2.4 million. That’s the amount that could be moved from the annual operating budget.

In other words, $30 million in the operating budget is $30 million, but $30 million in the capital budget is $2.4 million a year (roughly $80,000 per year for each $1 million paid by 20-year bonds).

Totally confused?

Well, what about the suggestion about a new convention center?

It’s estimated to cost at least $500 million, and it could easily be more. In previous years, some opponents of the cut in school funding immediately said that if city government could spend that much money on a convention center, it should give Memphis City Schools the $66 million that City Council was withholding.

Hurdles Galore

But like The Pyramid (and FedEx Forum, for that matter), the funding sources that are available to pay for a new convention center – TDZ, TIF and hotel-motel taxes – cannot be spent on schools.

After straining these revenue sources to pay for FedEx Forum, it’s difficult at this point to imagine how there would be enough revenue to pay off $500 million in bonds for a convention center, whose yearly debt service would be about $35 million a year.

In the end, finding that amount of money is the single greatest hurdle for the project to clear.