Showdown on Sales Tax Increase

The city of Memphis, Shelby County government, and the municipalities have finally found something they can all agree on: They all support a higher sales-tax rate.

Each of them, however, wants it for themselves and this is simply impossible.

All of the smaller cities in Shelby County except Millington have already voted for hikes in their local sales-tax rate to pay for their new school districts. Questions remain about whether consultants low-balled school costs to improve the odds for passage and whether property taxes may ultimately be needed, particularly if the municipalities are required to purchase the schools in their city limits.

The towns contend that because they pay county taxes and county taxes pay for the schools, they should receive them at no cost. The more logical argument is for the cost of the buildings to be discounted by the percentage of total county taxes paid by each respective town. Financial projections for the town districts are heavily dependent on buildings that cost nothing.

Privately, even some of the fiercest advocates for the town districts admit the thinness of their argument, based on the fact that Memphians pay about 65 percent of Shelby County taxes. However, the towns assume that if worst comes to worst, the Republican-dominated Tennessee legislature will intervene again on their behalf.

Meanwhile, the city of Memphis planned a sales-tax referendum as the answer to its financial prayers. It was counting on the $48 million in new sales-tax revenues to reduce its property-tax rate from $3.11 to less than $3 for the first time since 2000, to pay climbing bond payments, and to pay for universal pre-K education.

Not to be outdone, the Shelby County Board of Commissioners checkmated everyone by scheduling its own countywide sales-tax vote in November to close the budget hole of the new unified school district. If it passes, it cuts in half the sales-tax revenues Memphis wanted and divides the towns into winners and losers. According to calculations by Shelby County Board of Commissioners Chairman Mike Ritz, Arlington and Millington are winners, receiving more money than they pay in sales taxes. The opposite is true for everyone else.

The county referendum is the latest tectonic shift in the relationship between the towns and county government. For decades, Shelby County government subsidized all kinds of services in the towns and helped keep their taxes low. Despite the sense of ownership and the boasts by the towns’ leaders, Shelby County government, through its property taxes and sales tax, was the funder of schools in the municipalities.
Being jolted into a world where their needs are not the driving motivation of a majority on the board of commissioners has been painful for town officials and helps explain the anger and angst that frequently erupts.

No better example of the county government emphasis on the suburbs can be found than the way it was always Shelby County Schools’ needs that drove school capital funding, while the legally required proportional funding for Memphis City Schools (under the Average Daily Attendance requirement) was always treated as a windfall. For more than 25 years, it is difficult to remember a decision that was driven by the needs of Memphis City Schools (which just happened to have more than $450 million in unfunded capital needs of its own).

In the view of the seven county commissioners who voted for the sales-tax referendum, the countywide sales tax is a way of putting everyone on the same side of the table when it comes to quality schools. It was always likely that a sales-tax increase would be considered by Shelby County Government as the best option for funding the unified school district, so it should have been no surprise to the towns themselves, and nothing precludes them from funding its schools with property taxes just like Memphians have done with Memphis City Schools for more than half a century.

None of this political theater may matter at all if the vote on the countywide sales-tax increase does not pass. Town residents have already voted in favor of an increase and they will not get to vote in November, and Memphians are generally favorable when it comes to school funding, so commissioners believe its chances for passage are good.

But if it doesn’t pass, look for victory celebrations in the towns, an upcoming referendum in Memphis for a sales-tax increase benefiting city government, and a serious budgetary hole for the new unified school board to fill.

Previously published as the City Journal column in the October issue of Memphis magazine.