A few weeks ago, 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 on July 29, 2008, 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.
The cumulative city-county tax rate for Memphians is $7.4732 per $100 of assessment; in Knoxville, it’s $5.50; in Chattanooga, it’s $5.356; and in Nashville/Davidson County, it’s only $4.69.
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.
“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.