Metro Pulse/Insights/Wheel Tax

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by Joe Sullivan

County Commission is being called upon to provide for a referendum that would establish a vehicle registration or "wheel" tax in Knox County. The call takes the form of a resolution approved by the school board on Tuesday, in large part at the behest of the Knox County Education Association. The resolution urges Commission to act next week to place a wheel tax on the November ballot. As proposed by KCEA, a $25 per vehicle tax would raise $9.5 million, which would be dedicated to teacher pay raises.

Commission should put the wheel tax issue on hold for at least a month for several reasons. For one, commissioners need to see what types of tax increases, if any, the state Legislature adopts prior to its June 30 deadline for balancing the state budget. A $50 average increase in the state's vehicle registration fee is one of many revenue-raising options on the table for closing an impending $1 billion deficit. If such a statewide increase, which would raise about $250 million, is included in any package of revenue-raising measures that the Legislature may enact, it would almost certainly seal the doom of any attempt to impose a vehicle tax locally.

More importantly, commissioners should hope and pray that the Legislature doesn't foreclose another, far preferable way for Knox County to raise more money for schools and other purposes. At issue here is the difference between the 2.25 percent local option sales tax currently in effect in Knox and the 2.75 maximum allowed by state law.

The proposed CATS (for Continuing Adequate Taxes and Services) budget that's now front-and-center before the Legislature would capture that half-cent difference for state use. This would be accomplished by imposing a uniform statewide sales tax rate of 8.75 percent while eliminating local option sale taxes. Localities would be reimbursed for their resulting sales tax revenue loss but only to the extent of their local option rate.

The end result would be that Knox County taxpayers would be shipping $32 million a year to Nashville that could have been retained for local use—if only we staked a claim to the extra half-cent before the state preempts it. On a statewide basis, such preemption would yield the state $250 million, the biggest single component of the CATS budget's hodge-podge of tax increases totaling $800 million. While anything can happen in the current state of legislative turmoil, CATS doesn't seem any more likely to muster a majority in the House and Senate than any of the many other revenue-raising plans that have failed to do so up to now.

Hence, Knox County could get a reprieve that would allow it time to claim the $32 million before the opportunity is foregone. Such a reprieve is not likely to be a lengthy one, however. For another compelling reason, it's almost imperative for the state to establish a uniform statewide sales tax rate within the next year or so. The reason is that uniformity is a prerequisite to collecting a prospective $500 million a year in sales taxes on Internet, catalogue and other so-called "remote" sales that are presently exempt. Pending federal legislation to make them subject to state taxation is backed not only by the National Conference of State Legislatures but also by mall owners and powerful retail chains such as Wal-Mart. Remote sellers are insisting, however, that they shouldn't be subject to having to track and calculate sales taxes on a zip code by zip code basis.

A uniform statewide rate doesn't necessarily mean a higher one. Rather, it could be a lower one, as has been proposed in various tax reform plans based on an income tax. In any event, though, localities would be reimbursed (the technical term is "held harmless") for their loss of local option sales tax revenues. Thus, counties that have maxed out at 2.75 percent would be reimbursed at that rate, whereas those with lower rates would get commensurately lower reimbursement.

If the opportunity for raising the local rate is still there when the dust settles on this year's session of the Legislature, local officials should seize it immediately. Indeed, they would be remiss if they don't. Of the $32 million that would be left on the table if they fail to act, $16 million would go to Knox County schools while the county's general fund, the city of Knoxville and the town of Farragut would share the balance.

That $16 million for schools is nearly double what would be raised by the KCEA's proposed $25 wheel tax. Yet—and this is hard part to get across to voters—the sales tax increase wouldn't cost Knox County residents anything in the long run, whereas the wheel tax would come straight out of their pocket.

Another reason for deferring action on the KCEA proposal is that the teachers' union doesn't begin to have its act together in terms of making a case that would carry the day in a referendum (which would also be required to raise the sales tax). By stipulating that all of the proceeds go for teacher raises, the proposal smacks of being a pay grab instead of a comprehensive school improvement plan.

Moreover, public officials should be spearheading the effort to win voter approval, not the teachers' union. But School Superintendent Charles Lindsey has forfeited any ability to lead by his contentious style and his pretentious heralding of a "World Class School System." ("I wish that term had never been used. It's turned the community off," says the KCEA's president, Paula Brown.) Yet Brown hasn't even gotten around to meeting with the person who is integral to any county revenue-raising effort: namely, County Executive-elect Mike Ragsdale.

While the school system's financial management remains suspect, there may be merit to the $17 million funding increase (to $299 million) recommended by the school board as opposed to outgoing County Executive Tommy Schumpert's $8 million recommended increase. But even if $16 million in additional sales taxes for schools represents revenue that would otherwise be preempted, a good case needs to be made that the money will be spent to benefit students, not just teachers.