Why Nashville's Transit Plan Relies On A (Contentious) Sales Tax Increase | Nashville Public Radio

Why Nashville's Transit Plan Relies On A (Contentious) Sales Tax Increase

Mar 29, 2018

At the center of Nashville’s transit proposal is an increase to four taxes. And the largest — in terms of how much money could be raised, and how many people would pay more — would be a higher local sales tax.

The battle lines over this part of the plan can be both intense and nuanced. Sales tax is the kind of revenue source that could generate enough money for a transit plan the size of Nashville’s. But critics say there could be better options — or balk at the idea that transit is worth Nashville pushing its rate into a tie for the highest in the country.

But we’ll start with the basics before plunging into the arguments.

As it stands, the Tennessee sales tax is 7 percent and Nashville charges an additional 2.25 percent.

The referendum asks voters to increase the local portion by half of a percentage point starting in July, and lasting through 2022. After then, a second increase would kick in, again adding another half of a percentage point. The local sales tax would then be 3.25 percent. Add that to the state's 7 percent and the sales tax within Davidson County would be 10.25 percent. (Plan pages 39-41.)

This is perhaps easier understood using real dollars:

If the referendum passes, then for the next four years, for every $100 spent on taxable goods, consumers would pay an extra 50 cents. Imagine a grocery bill ticking up from $100 to $100.50.

Starting in 2023, with a second increase, that would mean spending an extra $1 on every $100 of spending.

The amounts are marginal on each transaction. Once added together over the course of a year, the sales tax increase could cost more than $80 for a middle-income family, according to a WPLN calculation using a federal consumer spending estimate and the median income in Davidson County.

Metro’s Case For Sales Tax

Metro has its reasons for building the proposal around sales tax.

One factor is the state’s IMPROVE Act, passed last year, allows cities to raise six types of taxes and to dedicate that additional money to transit. Of those options, sales tax yields the greatest amount of revenue.

That large funding potential, and its dependability over time, are reasons that many transit plans nationwide rely on sales taxes. (The other common choice is property taxes. More on that below.)

In dissecting the proposed taxes, Metro Chief Operating Officer Rich Riebeling also argues in favor of sales tax because it is paid in large part by people other than Davidson County residents.

“You shift a lot of the burden to our visitors and to actually some of the commuters who are causing some of the traffic problems,” he said. “It seemed to be a better way to broaden it … to include participation from non-Davidson County residents.”

The Nashville Area Chamber of Commerce estimates that 47 percent of the local sales tax is derived from out-of-county residents.

Still, Riebeling says sales tax isn’t his “favorite” tax — because it is regressive, meaning that low and middle-income residents feel its impact the most.

To mitigate that, Metro would offer free and reduced fares, based on income. Officials say that by waiving the cost of a $52 monthly bus pass, they would be balancing the increased sales tax burden borne by residents in poverty.

A Funding Alternative?

Any proposed tax increase can draw resistance. But other than a simple anti-taxation argument, this transit plan has also drawn a critique about the type of tax.

Some are arguing that a property tax increase would be more effective and more palatable to voters.

One person crunching the numbers is Bill Howell. He's a longtime Tennessee tax policy lobbyist with the now-defunct Tennesseans for Fair Taxation, which fought unsuccessfully to shift Tennessee toward an income tax.

Similar to that battle, Howell is again crusading against the regressive sales tax, “which disproportionally impacts low-income families.”

“It is a nibble here, a nibble there. You don’t keep track of the total amount. So it doesn’t really rise into your consciousness,” Howell said. “A sales tax is, in my mind, a sneaky way to collect tax without people getting up in arms about it.”

His analysis (he runs a blog solely focused on this issue) suggests that Metro could make a smaller change to the property tax and still raise the same amount — with 95 percent of Davidson County families paying less in the process.

He also considers the property tax a superior source of funding because the tax base is larger, and the annual bill is more transparent: “It’s one lump sum, and you take notice.”

Howell, who says he is in favor of mass transit, recognizes that his alternative would first require the referendum to be defeated. His preferred scenario is for Metro to come back with a plan built around a property tax increase.

A key complicating factor would remain: that the state’s IMPROVE Act doesn’t permit a property tax increase to be dedicated to transit, which would also change Metro’s approach to issuing bonds (unless there was a change at the state level to add the property tax to a revised IMPROVE Act).

That hefty sticking point, and others, come quickly from Riebeling when asked to compare property and sales tax options.

Riebeling says property taxes are already in high demand, paying for schools and the police department and other city essentials.

“If we sort of rob from the property tax to support transit, it’s going to really create an impediment to us to fund the long-term needs of the government,” he said.

And while Howell argues there’s enough of a ceiling to raise the property tax and still fund the essentials, Riebeling pushes back.

“There’s only so high you can go on taxes before there’s going to be complete backlash,” he said.

This question — of whether the transit proposal is worth the added tax costs — goes to voters soon, with early voting beginning April 11.

Until then, Howell continues to frequent community meetings on transit, and Metro officials say that sales tax questions remain among the most often asked.

Editor's note: This story has been corrected to provide a lower estimate of the increase that a median income family could expect to pay if the sales tax is increased as proposed.