Sunday, August 20, 2006

TACIR on Taxes

Both Anotherthing2 and Cup of Joe Powell have noted the recent TACIR study: Local Government Property Tax Revisited: Good News and Bad News. In short, the analysis by Harry Green and Stan Chervin finds that
the growing property tax burden and growing local government dependence on the property tax are on a collision course.
While they note that the problem stems from the fact that property tax revenues, while fairly elastic, is not growing at the same rate as demand for services, no mention is made of exactly which local government services might be driving the pressure on local government budgets.

I would surmise that for all counties, along with the cities and special school districts that support school systems, one of the largest drivers is education costs.

Green and Chervin close with three proposed actions:
1. An expanded state circuit-breaker program designed to blunt the impact of rising property tax burdens on a broad-spectrum of low and moderate income households. The state aid should be targeted to phase out as family income rises, but not set so low that moderate income families are excluded from the program.

2. A significant increase in state aid to local governments designed to help them provide a basic level of services to their residents. The aid should go to the level of government that supplies the service (need based), and reflect consideration of both fiscal capacity and fiscal effort.

3. Significant new taxing authority that allows local governments to take advantage of existing tax bases or activities that are currently untaxed. Possible changes include an increase in the local sales tax single article limitation (currently set at $1,600), the authority to levy payroll taxes, and local ad valorem vehicle taxes in lieu of existing wheel taxes.
So, while admitting that the problem stems from the cost of services not keeping pace with property tax revenues, their first suggestion is to put some sort of limit on property tax increases. How, then, will local governments pay for these services? And of course, no mention is made of the fact that low to moderate income residents already pay low to moderate property taxes, simply because the amount is determined by the value of their property. One exception would be for the elderly, who may well have a more expensive (paid for) residence, while on a fixed retirement income.

That the State needs to step up to the plate with a significant increase in aid to local governments is a no-brainer, but I take issue with tying such aid to "fiscal capacity," as the fiscal capacity formula is flawed in that it does not take into account property tax rates relative to others -- a local government with a high property tax rate is deemed "more wealthy," while those with lower property tax rates are categorized as "more needy."

I'm certain that the prospect of allowing new taxing authority to local governments is bound to cause significant outcry, but it's worthy of consideration. Take, for example, the concept of a payroll tax: communities with a large employment base, where many work in, but do not live (or pay taxes) in that community are an expense -- traffic management, streets, utilities, and emergency services. Currently, the expenses for the non-resident workforce falls heavily on the residents, especially in a city like Oak Ridge, where the employer pays no property tax.

If some of the expense for those commuter costs were relieved via a payroll tax, then more of the resident property tax receipts would be available for resident services (like education).

I agree completely that something has to change, and that the local property tax is being squeezed. The State and Federal governments must commit to fully funding their mandates -- or simply making optional recommendations.

I've taken Harry Green to task before, with no success in changing his perspective... but I have had some measure of success in pointing out the flawed reasoning to others. Like the Senate Education Committee. Harry and I have written dueling editorials for Tennessee Town and City. Unfortunately, rather than intelligent public discourse, this argument seems to have gotten personal.

Heaven forbid that anyone should challenge the great and mighty statistician on the formula that he personally developed... one so complex that few in government understand, but simply take at face value.

It's simple: a community with a high tax rate to support essential services must be given credit for that effort, or else the incentive is to not support those essential services. And the only way to properly measure that effort is to compare tax rates, particularly measuring the allocations to services required by the State.

If Tennessee would only commit to a realistic level of per-pupil spending in education, an equal amount for every pupil in the state, then a huge burden would be lifted from the local property tax.


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