Thursday, February 11, 2010

A Primer on Budgeting

With other game changers taboo, property tax hike is likely.

Posted By on Thu, Feb 11, 2010 at 4:00 AM

The city of Memphis, Shelby County, and Tennessee state government are all facing a budget crisis. Solving it is going to be difficult because so many options are off the table.

It's tempting to turn away from such matters. It's complicated. It's overblown. It will resolve itself. It's out of my hands. But a government budget has a lot in common with a personal budget or a household budget. Here are the pros and cons of some options:

Blame someone, such as your roommate, spouse, or former mayor Willie Herenton. Momentarily satisfying but ineffective and ignores certain facts. In his first mayoral term, way back in 1992, Herenton proposed merging city and county government by having Memphis government disappear. In his second term he took a different tack called the Formula For Fairness. In his fourth term he advocated shifting school funding to Shelby County. In his fifth term he took himself out of the picture.

Nickel and dime your way to prosperity. Sweeping the change off your dresser, like the $50 annual wheel tax in Shelby County, doesn't raise big bucks.

Don't pay your bills. Thousands of Shelby County residents have walked away from a home mortgage. The owner's problem becomes the bank's problem which becomes government's problem.

Tap your savings. Known as "reserves" in government lingo, the city of Memphis and the school board and the state have already done this. The downside is higher credit costs and risk.

Tax sinners. Tennessee already has a state lottery and has recently raised taxes on tobacco and alcohol.

Sell the family jewels and other assets. Again, the former Memphis mayor proposed selling parks and even suggested wringing more money out of Memphis Light, Gas & Water, for which he was roundly criticized.

Go after deadbeats. The city and county collect delinquent taxes in-house and via a contract with an outside firm.

Ask your relatives. "Uncle" Governor Phil Bredesen says no.

Be less generous. Memphis and Shelby County grant more tax freezes than everyone else in the state combined. The upside is jobs and downtown development. The downside is that a freeze of 10 or 15 years becomes an entitlement and the properties never go back on the tax rolls. In a city that relies on property taxes for revenue, this is huge. Most of the downtown anchors are hospitals, public buildings, or businesses with a tax freeze.

Raise the sales tax. Big money because it's broad-based. But, at 7 percent, Tennessee already has the second highest rate in the country, and local governments can add another 2.75 percent. Tennessee is one of only 14 states that taxes food.

Impose a state tax on earned income. Big money, broad base. Tennessee is one of nine states without such a tax. The last governor who proposed it, Don Sundquist, was all but ridden out of Nashville on a rail.

Impose a Memphis payroll tax. Birmingham, Louisville, St. Louis, and Cincinnati do it. A 2004 study in Memphis said a 1 percent tax, coupled with a property tax rate reduction, would raise $180 million because it hits a bigger target. The proposal was trounced at the urging of the chamber of commerce.

Consolidate governments. The government equivalent of a couple cutting up some of their credit cards. The "conversation" is under way, but separate votes will be taken in Memphis and in Shelby County outside of Memphis. Possible long-term benefits, but even backers admit there are no short-term savings.

Cut major expenses. Only big cuts mean big savings. That would be schools and police and fire. Courts have upheld the city of Memphis obligation to fund schools. Closing schools is politically unpopular; there are more schools and employees today than there were five years ago when the system had 10,000 more students. Cutting cops and closing fire stations is even more unpopular.

Raise property taxes. Big money, and broadly based, with the notable exception of all the nonprofits, delinquents, foreclosures, and tax freezes. Last year's reappraisal raised taxes by raising home values for thousands of homeowners despite the recession.

With other potential game changers off the table, a property tax increase to cover, if nothing else, the shortfall for Memphis City Schools is likely. Like the sales tax, the mechanism is already in place. The problem is that Memphis already has the highest property taxes in the state, and homeowners who have stayed inside the city and paid their bills will take the hit.

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