Regress for Success

It took an extra month to get it done, but the Metro Council finally cleared the way last week for a fall referendum on Mayor Bill Purcell's plan to raise the local sales tax by a half-cent. The increase, if voters approve, will max out the city's "local option" portion of the tax at 2.75 percent, bringing Nashville's total sales tax to a staggering 9.75 percent. So now, as referendum politics kick into gear, it's time for Nashville liberals to ask Bill Purcell a crucial question: what's a nice guy like you doing in a regressive place like this?

The big revenue boost in Purcell's original budget was an 84-cent property tax hike that would raise $126 million in new money for the current fiscal year. (The council whittled that down to 67 cents, but threw in a $20 jump in the county's vehicle registration fee to make up some of the difference.) The sales tax increase would start in January, and raise about $58 million in new revenue for the next fiscal year. The plan is to put 80 percent into schools, with the rest financing tax relief for the elderly.

The right-wing taxophobic crowd pretty much hates all taxes, so for them the relative merits of raising property vs. sales taxes amount to a distinction without a difference. But for those who worry about funding public services not just adequately but also fairly, how you tax matters. Progressives may welcome the prospect of new money for education, but also must be scratching their heads over Purcell's approach. After all, don't high sales taxes hit the poor the hardest?

Indeed they do. Taxes are progressive when people with higher incomes pay a higher proportion of their earnings. Taxes are regressive when they put a similar or greater proportional burden on poor people than rich people. Taxes on consumption—sales taxes—do precisely that because a low-income household typically spends a greater proportion of its income on taxable items than a wealthier one. An affluent person might buy more and more expensive goods, and so pay more sales taxes overall. But a sales tax makes necessities—the things rich and poor alike consume—proportionately more costly for those with meager resources.

Many states compensate by keeping sales taxes off such staples as food and medicine. Tennessee does a little of this. The state portion of our sales tax is 7 percent generally, but 6 percent on food and food ingredients. (Most of the 35 states that exempt food exempt it completely.) We exempt prescription drugs, but not over-the-counter medicines (as a dozen other states do). The total state and local sales tax in Tennessee, using a local option average, is 9.35 percent—numero uno in the nation and well over a half-cent higher than second place Louisiana. Ours is not just a regressive tax, it's a great big regressive tax, one that Purcell proposes to make even bigger.

Metro finance director David Manning concedes the regressive nature of the sales tax, but points to the tax relief plan as a way of "leveling the regressive nature of all local taxes." Perhaps so, but for a limited segment of the community and on the backs of those who have no assets. So why does a semi-progressive mayor like Bill Purcell prefer tinkering with the sales tax instead of raising the revenue we need with property taxes, which do at least tax wealth?

One possibility (with apologies to Deadheads) is the "bury Garcia" theory. The working hypothesis is that Purcell doesn't mind linking Garcia's future to a public referendum. From the outset, the sales tax plan had the look and feel of a vote of confidence on public education and on the mercurial tenure of schools director Pedro Garcia. Until recent (although still incomplete) good news on test scores, school performance has been lagging, and the relationship between Purcell and Garcia has been, as Deputy Mayor Bill Phillips put it last month, "undoubtedly strained." Forcing Garcia and the school board to sell their goals and progress directly to the community solves two problems at once: Purcell gets to continue to play the part of an activist education mayor (which he does well), and maybe hangs his embattled schools director out to dry in the bargain.

A less Machiavellian motive for the sales tax plan is simply to keep property tax increases at tolerable levels politically. Purcell's proposed 84-cent increase came in a few cents under his first term increase four years ago, and just a penny under Phil Bredesen's last tax hike in 1997. The new sales tax revenue would allow school funding to rise next year without making tough choices elsewhere in the budget and without higher property taxes. And with Nashville the economic hub for a metropolitan area with substantial tourism, a sales tax has the added virtue of wringing non-trivial money for city services out of visitors and suburbanites (and residents who don't own property).

A less visible rationale for a sales tax increase is a "use it or lose it" argument: raise the local option tax to the maximum before the state makes it no longer available. Phillips and Manning both worry about legislative proposals at the state Capitol in recent years that would abolish the local option sales tax, and have the state rebate each county the amount of the lost revenue. This 'revenue grab' logic would have us max out the local option now to avoid losing the opportunity later ever to raise that money for city purposes.