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Knoxville’s taxes in comparative context

by Jack Neely

In less than two weeks, Knoxville voters offer their two bits about who will be the next U.S. president. Few expect that Knox County going one way or the other will make any difference in that race.

Knox County voters will definitely be the deciding factor about whether or not they’ll pay an increased wheel tax. The general expectation is that the $30-per-automobile boost—the subject of a bitter controversy over the summer, culminating in a successful anti-tax petition drive—will fail.

However, the promise that failure of the wheel tax will automatically boost the property tax rate by 18 cents, makes the voters’ choice more complicated than it might once have seemed. Though the wheel tax has picked up some 11th-hour support, opposition to it seems to be fomenting some unusual alliances among groups with very different goals for the county.

There’s an old mantra in East Tennessee almost as beloved as Wish that I was on Ol’ Rocky Top, and a good deal older: We already pay too much in taxes.

The statement is hardly controversial. We hear it nearly every day on talk radio, read it in letters to the editor, and when somebody presents us with a petition to that effect, we’re likely to say, “You got that right,” and sign. To get elected, politicians are more or less obliged to agree that taxes shouldn’t ever be raised. Nearly all of the candidates for state office who will appear on the ballot have expressed opinions ranging the gamut from distaste to abhorrence for a state income tax. Most voters in East Tennessee will not even have the option of voting for a candidate who favors a state income tax. The candidate who agrees that Tennesseans already pay too much in taxes most convincingly is the one more likely to be elected. At the moment, it seems to be that simple.

But the question that few politicians have the temerity to ask is, ‘compared to whom’?

Comparing tax burdens between American cities turns out to be a damnably complicated proposal. Every state’s constitution is different in terms of what the state provides to local governments and how it allows local governments to fund themselves. State and local governments assume varying shares of the responsibility for public education. In some states, local governments even get a share of the state income tax.

All experts agree that the connections between local and state taxes are so complex that you can’t compare tax burdens in cities without looking at the underlying tax burdens of the states in which the cities are located.

States are somewhat easier to compare than the cities within them. The Massachusetts Taxpayer Foundation, a group formed to lower taxes in a notoriously high-taxed state, last month published a comparison list of the tax burdens in all 50 states. Tennessee was number 50: the least-taxed state in the United States. Which is, in turn, among the lesser-taxed nations in the industrialized world.

The U.S. Census Bureau also lists Tennessee 50th in combined state and local revenue, per capita, for 2003; 49th in terms of revenue as a percentage of personal income. A separate census study for 2002, which also includes the District of Columbia, puts us at 51st.

“We’re just drastically lower” compared to the rest of the nation, says Bill Fox, UT professor of economics. “Knoxville could be the highest-taxed place inside Tennessee—and still be low-taxed compared to the United States.”

Nearly every such comparison puts the Tennessee taxpayer at or near the very bottom. It’s not lost on some that Tennessee is also near the very bottom in various assessments of public services, especially public education. One Knoxville lawyer, an advocate of more funding for education and other services, calls Tennesseans “bottom feeders.”

However, Tennessee has among the highest sales taxes in the nation. Even though sales-tax revenues are included in the figures that put Tennessee at the bottom of so many lists, the state’s high sales-tax rate—which, combined with local-option sales taxes, averages almost 10 percent—often startles newcomers. The few other states with comparably high sales-tax rates have exemptions for groceries. Tennesseans pay the highest grocery sales taxes in the nation.

Tennesseans for Fair Taxation cites statistics to demonstrate that, thanks to our unusual dependence on a sales tax as opposed to an income tax, Tennessee’s poor pay a much higher proportion of their income than most Americans do—and a much higher proportion than the wealthy in their own state. According to the Institute on Taxation and Economic Policy in Washington, the poorest 20 percent of Tennesseans pay 11.7 percent of their income in state and local taxes. The wealthiest one percent of Tennesseans pay only three percent.

There’s a silver-plated lining, though, thanks to a new state-sales-tax deduction on federal income-tax returns, advocated by Sen. Lamar Alexander. Because of Tennessee’s high sales tax, Kinney says, Tennesseans will benefit from the federal deduction much more than the rest of the nation—assuming taxpayers take advantage of the break, which requires filing an itemized form.

Local taxes tend to be higher in the more populous, more complicated counties, which call for more varieties of services; Shelby County, home of Memphis, taxes its property owners at more than $4 per $100 in assessed value (25 percent of appraised value). At the other end is rural Gibson County, a relatively poor county where the population is less than 50,000, and the taxes are less than $1 per $100.

And these more complicated counties also host cities, which levy their own, additional property taxes. As they often feel obliged to remind suburbanites, city residents pay county taxes at the same rate as outside-city-limits county residents do.

Knox is the third-most populous county in Tennessee, but its current tax is only the 12th highest county property tax in the state. In East Tennessee, Anderson County and even Cocke County pay significantly higher property taxes than Knox does.

Granted, though, in Tennessee’s two biggest Smoky Mountain counties, Blount and Sevier, property taxes are lower. Sevier’s property taxes are less than half of Knox’s. And Sevier County offers to foot the bill for its high-school graduates to Walters State Community College.

“I love looking at Sevier County,” says John Werner, Knox County’s finance director. “Here’s their deal. They have big sales-tax revenues. It’s a tourist spot. That’s all it is. They have a property tax of $1.45.” Sevier County is, indeed, the states’ second-biggest generator of sales-tax revenue.

“In Robertson County, where I come from, the wheel tax is $35. Property tax is lower than it is here. But there’s not much of diddly squat in Robertson County. That may be why I left. They’re an nth of what Knox County is.”

A minority of Tennessee counties don’t have wheel taxes at all, but several have taxes much higher than Knox’s, even after the hike. Wheel taxes range as high as $70 a car in Crockett County, or $55 in Lauderdale County. Of the Tennessee counties that do have wheel taxes, Knox County was, until County Commission voted to raise it this year, the lowest of all.

“If you look at comparable counties throughout the southeast, our wheel tax is still about half what a comparable county pays,” says Werner.

In most states that have wheel taxes, including several otherwise conservative Southern states, wheel taxes are calculated by ad valorem methods; the more valuable the car, the higher the tax. An expensive sports car might cost thousands a year, whereas a car of modest value might hardly be taxed at all.

Werner scans a list. “In Birmingham, which is ad valorem, it’s $143 a year for an average vehicle. Greenville, $169. Huntsville, $122. Lexington, $239.”

Werner, a conservative-sounding guy, believes the wheel tax is modest and necessary for improving business investment and quality of life in Knox County. “A rising tide lifts all ships,” he says.

One irony about the county’s wheel-tax controversy is that it turns out to be a bitter fight between two groups which, in most of the country, might both look like right-wing factions.

The wheel tax is, at bottom, a flat tax of the sort touted by conservatives of the more extreme stripe. Every car, whether it’s a new Jaguar, a Cadillac SUV, or a wrecked ‘89 Yugo, pays an additional 30 bucks. To some conservative Knoxvillians, the one-car, one-price approach may seem the very definition of fairness.

Ragsdale’s administration reportedly didn’t consider the ad valorem model. One prominent conservative advocate of the Ragsdale wheel tax mutters that ad valorem taxes are tantamount to “redistributing the wealth”—even though it’s really no different from the way property taxes are calculated.

To others, the wheel tax is a regressive tax that’s unfair to the poor. (For the record, the disabled and elderly making less than $12,500, are excused from this wheel tax.)

However, those most vocally opposed to the tax are not those who think it’s regressive or unfair. Proponents of an ad valorem tax are keeping a low profile at the moment. The most outspoken opponents of the wheel tax are those who propose there should be no additional county taxes at all.

Leading the charge is the populist Gary Sellers, who works for Jones & Lee Supply Co. Little known before this past summer, Sellers is an East Knox Countian who opposed the county’s proposal to build a new main library downtown and a related wheel-tax boost. In the wake of Sellers’ petition drive, the county apparently dropped plans to commence work on the new library and forced Knox County Mayor Mike Ragsdale’s $30 wheel tax increase onto the Nov. 2 ballot for a referendum.

“Ragsdale said he’d redo the county; cut back on salaries, try to relieve some of the expenses,” says Sellers. “But he came up with a budget that was highly imaginative, that I’m not sure the citizens of Knox County are ready for.

Sellers suspects the county will continue to raise property taxes anyway. “When this is on the books, the county can raise taxes all they want,” he says.

“My solution is real simple: go back to the old budget,” that is, last year’s. Sellers says he and his allies haven’t worked out models of how a no-tax-hike approach would affect the county, but he cites one figure: Natural development, he says, has led to a natural $6 million increase in county revenue. He admits he’s not sure whether that addition alone, which would represent only a little more than one percent of the county budget, would make up for any inflation-related shortfall.

Supporting the wheel tax in the wake of Sellers’ unexpected challenge is a motley assortment of progressives, some of whom are still holding out hope for the tabled new main library project; ideological flat-tax conservatives; a handful of environmentalists who, considering the environmental burden of automobiles, think cars are generally undertaxed; and developers and homebuilders worried about the effect of a property-tax increase on their favorite projects. Chamber Partnership chief Mike Edwards says the business managers who make up the Knoxville Area Chamber Partnership favor the wheel tax about four to one.

“Nobody at the chamber, very few, anyway, are saying no tax [increase],” he says. “We’ve got to have an economy that works, got to have services that work, for Knoxville to be able to grow and prosper—as opposed to not.”

Attorney John Valliant speaks for the loosely organized ad-hoc group, Citizens for Fair Taxes, which supports the unexpectedly threatened wheel tax, and has mounted a one-month effort to promote it. “It’s a progressive group,” he says. “There are several perspectives that we come from, I suppose. If you believe Knox County needs to move forward and attract industry and create jobs that will invigorate the tax base, make it bigger, it would lessen the tax burden in future years. We’ve got to do something, and we really haven’t done what we need to do to get this county generating new jobs. We’re trying to move Knoxville forward instead of staying in the same place where we are, or have been since the Cas Walker era. Get us moving forward, economically and culturally.”

Valliant prefers a wheel tax because it’s “broader based. It brings people into the tax picture that use county services but haven’t been taxed much before.

“With a property tax, there’s a lot of creep. The wheel tax is set. It’s gonna be what it is. With the property tax, the property value is gonna be reassessed next year.” He’s also concerned that even minor hikes in the property tax could squeeze some marginal residents out of home ownership.

Proponents of the wheel tax may be a motley assortment, but opposing the wheel tax is an equally unlikely and uneasy alliance.

If the wheel tax is defeated, the county will increase in the property-tax rate. Werner would rather see the wheel tax passed, but defends the fall-back property-tax hike as reasonable. “Eighteen cents is relatively inexpensive,” he says, “compared to what was asked for [five years ago] at 55 cents.”

Sellers is angry about the promise that the county will raise property taxes if the wheel tax fails. He he’s against them both. “I don’t really like comparing one to the other,” he says. “To me, it’s a blackmail tactic. It’s a slap in the face to the 20,000 people who signed that petition.”

Ironically, some of those who will support Sellers’ anti-wheel-tax measure with their vote on Nov. 2 will do so because they favor the more-progressive property-tax hike to the conservative, arguably regressive wheel tax.

The city level complicates the situation further. City residents pay county property taxes, of course, but they also pay city property taxes separately.

City-to-city comparisons aren’t as easy to come by as county-to-county ones, but the notorious Places Rated Almanac gives it a try. A recent edition lists 354 metro areas in terms of cost of living, and, indeed, Knoxville is very near the bottom of the American stack, deep in the bottom fifth. Our “betters” in that regard—those with even lower taxes—include Enid, Okla.; Anniston, Ala.; Charleston, W.Va.

Property owners in Boston pay property taxes four times greater than those of the Knoxville metro area. You’d think we might have something in common with Ann Arbor, Mich.; it’s a college town a good deal smaller than Knoxville, but considering they regularly pack a stadium even larger than Neyland, they may be our chief rival as America’s most college-football-mad city. Their property tax is three times as high as Knoxville’s.

Of course, that’s not to mention that many of these cities with high property taxes are in states that also have income taxes. “The bottom line is, we’re a low-tax state, and a low-tax city, by national standards,” says Professor Fox.

Kinney, a native Tennessean who lived for 12 years in New Jersey, sounds almost awed when he talks about the city’s low rate of taxation. However, he says it’s vain to try to compare Knoxville’s tax burden to that of any city outside of Tennessee. “It’s apples and oranges,” he says. “Some states share income-tax revenues” with local governments, he says. “They can keep property taxes lower that way.”

In comparing Knoxville to other cities, Kinney says, “We look at the big four”: Memphis, Nashville, Knoxville, and Chattanooga. But within Tennessee, it is possible to find cities with taxes apparently lower than Knoxville’s. Some mention Nashville and Chattanooga, where the property-tax rate is indeed lower than ours. (City property taxes are higher in Memphis, which has much greater urban challenges than other Tennessee cities.)

Kinney says Chattanooga’s lower taxes are probably temporary, that the two cities are in a leap-frog pattern. “We just raised taxes,” he said. “We’re on a three-to-four year cycle. Chattanooga may have to raise taxes a year from now.”

Chattanooga’s also blessed to have some extremely deep-pocketed and civic-minded families who, working hand-in-hand with city officials, perform some of the functions of a well-endowed municipal government, funding monumental projects which, in most other cities, might have been largely paid for by city government. The privately endowed Lyndhurst Foundation was the major funding source of the Tennessee Aquarium. But Chattanooga’s a rare case.

It’s interesting to note that several Tennessee cities that have lower tax rates actually spend more money, per capita, on their citizens than Knoxville does. According to the reference resource 2004 County and City Extra: Annual Metro, County, and City Data Book, Nashville, Memphis, Johnson City, Kingsport, and Oak Ridge all spend more on city services per capita than Knoxville does. Nashville, in particular, spends 42 percent more per citizen than Knoxville does. How can that be, considering the fact that their property taxes are lower?

Kinney mentions one obvious factor in Nashville’s fiscal favor: that consolidated government runs more efficiently than Knoxville’s divided city-county government, which entails some duplication of services, not to mention a good deal of friction. But there may be even bigger advantages to the Nashville taxpayer.

“Nashville is the state’s number-one sales-tax generator,” says Edwards. Music City enjoys a large tourism industry. Edwards says tourism-related sales tax is the same reason that Sevier County, another tourist attraction and the state’s second leading sale-tax generator, can do much with very low property taxes.

Edwards also suspects that Nashville wastes less of its property in low-performing capacities, especially downtown and in the surrounding areas. Though downtown Knoxville is improving in many ways, and property values have climbed both downtown and in adjacent neighborhoods, inner-city Knoxville, broadly defined, still contains dead factories, empty office space, abandoned businesses.

“Many parts of the center city are blighted, major parts underperforming,” Edwards says. “There are areas that have been abandoned for what’s starting to seem quite a long time.”

Growth on the fringes, which requires new roads and infrastructure, is by nature more expensive to the taxpayer. “Growth cannot continue to occur moving out from the center,” Edwards continues. “We cannot afford to pay for roads, utilities, schools, if the core becomes vacant. The next green-field development will have to be paid for by everything that is already existing.”

Interviewed at a cafe table on Market Square, Edwards says, “Mike Lowe’s tax books represent every square inch of Knox County, including the Ziegler building.” He points over to the handsome three-story building, partly renovated but currently vacant. “If you were to take that building and put it into a major city center, it would rent for $20 a square foot instead of being vacant. Its tax assessment will be a lot bigger. It will lower the tax burden of somebody living in Inskip, or Gap Creek, or West Hills.”

He also mentions a very different site, two miles to the north: the Coster Shop, the huge industrial site abandoned a few years ago by Norfolk Southern. “If you have woefully underproducing property, it isn’t going to fix itself. It requires public expenditures to get it going.”

By contrast, he says, “Nashville gets to have a lower property tax because their downtown is creating great property values.”

Center-city development is ultimately better for the taxpayer, because it requires much less new construction of public infrastructure. “Taxpayers all over the county, whether inside or outside of the city, are going to get some economic impact from downtown,” Edwards says. Already, thanks to the state sales-tax recapture deal, the Knoxville taxpayer is already getting more relief from downtown businesses, on a percentage basis, than from other parts of town.

Sellers and the anti-tax activists do raise a question that the layman might not be able to answer right away: Why do taxes keep rising? Property taxes are based on percentage of value, and new development and an influx of population in one of the state’s most rapidly growing counties will increase property-tax revenues naturally. You’d think we could hit a certain percentage and stay put.

“Higher taxes do reflect the fact that our society is getting more and more complicated,” says Mac Simpson, a retired UT professor of political science who’s now a boardmember of Tennesseans for Fair Taxation. “It’s like any other kind of machinery: the more complicated the machinery, the more oil it takes to lubricate it.”

Edwards and others acknowledge that suburban development—requiring new roads, new infrastructure, new schools, new branch libraries, longer trips in law-enforcement and other government vehicles—is more expensive to taxpayers; and the farther away development gets from the urban centers, the more expensive government gets. As Knoxville becomes more suburban, taxes for everybody are likely to climb.

In some cities, impact fees attempt to ameliorate that effect. Those fees, based on the cost that new development is expected to have on the taxpayers, usually for building new roads, schools, and other infrastructure, have caught on in some cities out west, where impact fees are higher in proportion to a development’s distance from the core of services. A more conservative version of impact-related assessment is in place in some of the suburban counties around Nashville.

However, Edwards blames most of the rising costs of government on inflation. Both city and county governments buy a lot of gasoline, for example, and in the last year gasoline prices have risen much faster than the city’s or county’s total assessed property value.

Kinney cites what he considers to be the biggest factor in driving tax increases at every level. The city of Knoxville is Knoxville’s biggest employer, and employed people are expensive.

“About 70 to 75 percent of the cost of government is the cost of people.” Kinney says, adding that personnel costs are rising, and rising faster than inflation. In particular, the cost of healthcare, which American workers have come to expect as a fringe benefit of employment, is increasing at double-digit percentage rates.

Of the anti-tax activists, Kinney says, “I think they’re just blowing smoke, quite frankly” he says. “Nobody likes to pay taxes. I don’t like to pay taxes. I’m a fiscally conservative guy. But we live in a very, very low tax-burden area.”

No one’s arguing that that’s necessarily a bad thing in itself.

Sellers says, “People come to Knox County for a very good reason: because taxes are low. It’s a definite plus, for the people that live here. I know a lot of people have left because of taxation.” He says they’ve moved to other counties in the region, merely because they felt too heavily taxed. Sellers also mentions that the Merita Bread Company has transferred title of its fleet of more than 100 trucks to Anderson County, which has no wheel tax (though, again, their property taxes are higher than Knox’s).

However, recruiters have also had to deal with the opposite phenomenon: that of talented and educated people reluctant to move to Knoxville precisely because of the area’s relatively low investment in public services, especially education.

When trying to sell businesses on the Knoxville area, Edwards admits, “We use everything as an inducement,” including the low tax rates. “A company looking to come here as opposed to Greenville, South Carolina—or India—they’re all looking at a per-unit cost. What drives it? Taxes are one thing. Productivity of the work force. Laborers in Mexico may be 25 cents on the dollar. But technology can close the gap. One person today is producing what three or more did, in a shorter period of time. To do that, you’ve got to have the infrastructure, you’ve got to have a labor force, you’ve got to have capital.

“You need a harmony. You get one factor out of kilter—that affects the others. Let’s say that, in order to have a competitive tax rate, we blow up education. Yeah, you have the low tax, but you don’t have the work force. You’re dead.”

Mac Simpson sounds discouraged. “We’re in kind of a circular situation where people hate to raise taxes for schools. But when they don’t, their kids are progressively less well educated than their neighbors—and less likely to support a tax increase. It’s a vicious circle—or a vicious spiral.”

He says it’s rare for a populace to vote themselves a tax increase, but that an educated populace—the first example in our region that comes to his mind is Oak Ridge—occasionally does.

“I’m convinced the talk-radio crowd have never figured it out,” says Edwards. “They don’t have to solve problems. They say, ‘I don’t like it.’ Well, I don’t like it, either, but what does that have to do with anything? We have to fund education, both for our kids’ and for the economy’s sake.

“It’s not as simple as being ‘against taxes,’” Edwards says. “We’re reducing our public debate down to the lowest common denominator. It sounds great from a bravado standpoint—but the communities that think it through are the ones that are going to prosper.”

October 21, 2004 • Vol. 14, No. 43 © 2004 Metro Pulse