CITY OF SHELBYVILLE
LOCAL TAX REVENUE
PROJECTION
FY 2001-2005
Prepared by: Don J. Darden
Municipal Management Consultant
The University of Tennessee (MTAS)
I.
Introduction
The City of Shelbyville, Tennessee has requested that MTAS prepare an analysis
of projected local tax revenue for the next four years. Additionally, Bedford County
has requested that the City of Shelbyville contribute any increase in a proposed local
sales tax rate to the county. In order to prepare such an analysis, it is necessary to
review the existing local tax base to determine what elements are increasing,
remaining the same, or decreasing.
II.
Local Tax Base
The following table shows the revenue sources that comprise the city’s local
taxes:
Local Taxes
Source
Amount
Percent
Property Taxes
In Lieu of Taxes-Electric
Beer Taxes
Local Sales Taxes
Business Taxes
Cable TV Franchise
Other
$3,870,000
380,000
385,000
1,110,000
230,000
110,000
161,266
61%
6%
6%
18%
4%
2%
3%
TOTAL
$6,246,266
100%
It can be seen from the above table that property taxes comprise 61% of local
city taxes and that the next largest source of revenue is the local sales tax, at 18%. For a
city the size of Shelbyville, this is a rather large difference. The City of Tullahoma, for
example, collects 30.57% of its local taxes from property taxes and 29.5% from the local
sales tax. The City of Manchester has budgeted this year $2,197,575 in property taxes
and $1,876,497 in local sales taxes. In Manchester property taxes versus sales taxes
amounts to 54% property and 46% sales. That is very comparable to LaFollette,
Tennessee, where the sales taxes amount to 45% of local tax sources. In Shelbyville a
comparison of the property taxes versus local sales taxes shows that 77.7% is property
tax and 22.3% local sales taxes. The commercial base is larger in Shelbyville than in
Manchester or LaFollette. The difference apparently is that Shelbyville contributes $.75
to the county for education in addition to the first half that it is required by law to
contribute.
Of the revenue sources comprising local taxes, the City of Shelbyville has control
over property taxes and to some extent local sales taxes. The State of Tennessee
prescribes the formula for in lieu of electric payments, beer taxes, business taxes, and
cable TV is limited. The city council can adopt whatever property tax levy it chooses,
and it cannot increase the local sales tax rate except by referendum.
The following chart shows the composition of local tax sources in Shelbyville.
SHELBYVILLE LOCAL TAXES, FY
2001
4%
4%
6%
PROPERTY
INLIEU ELEC.
LOCAL SALES
BEER TAX
BUSINESS TAX
OTHER
18%
62%
6%
III.
Property Taxes
The current property tax rate in Shelbyville is $1.91/$100 of assessed valuation.
This year revenue from property taxes is expected to total $3,745,000, exclusive of
delinquencies for prior years. From FY 1999 thru FY 2001, property taxes have
averaged increasing by 8.3% annually. If the city property taxes continue to increase
at the current rate, property taxes will increase by 37.6% by the year 2005, as can
been seen from the table below. That is a very significant increase.
This table also shows the effect on the property tax that would result should the city
contribute an extra one-half cent sales tax to Bedford County. Here property taxes
will have increased by 48.4% over a similar period of time.
Property Tax Projection
Fiscal Year
Property Taxes
2001
2002
2003
2004
$3,745,000
$4,055,835
$4,392,469
$4,757,044
Property Taxes if City Relinquishes
Added Local Sales Taxes
$4,373,835
$4,729,549
$5,138,164
2005
$5,151,879
$5,555,863
The chart below shows the effect of relinquishing the added one-half cent sales tax on
city property taxes.
PROPERTY TAX PROJECTION
6000000
DOLLARS
5000000
4000000
Property Taxes
3000000
P.Tax without
Sales
2000000
1000000
20
01
20
02
20
03
20
04
20
05
0
FISCAL YEAR
IV.
Sales Taxes
The current sales tax rate in Bedford County and Shelbyville is 7.75%. The State
collects 6% and the local government share is 1.75%. The State has authorized local
governments to levy a sales tax rate of 2.75%. No one likes to raise taxes, and
reluctance to increase the local rate, without a compelling reason, is understandable.
It should be pointed out that legislative discussions in Nashville have considered the
State of Tennessee taking the extra sales tax revenue, i.e. the one cent that is not
being taxed in Bedford County and depositing it in the State coffers. The distribution
of the sales taxes that are currently collected in Bedford County is as follows:
State of Tennessee
Percent
6%
Bedford County
*1.25%
Shelbyville
*.5%
*This local sales tax is limited by State law to single purchases of $1,600.
A. Options
Options for a proposed sales tax increase are (1) no increase, (2) one-half cent
increase by the city, (3) one cent increase by the city, (4) one-half cent increase
county-wide, and (5) one cent increase county-wide.
1. No increase in the local sales tax rate is likely to mean that the city’s
property taxes will continue to increase at 8.3% per year. Section II of this
analysis shows what is likely to occur during the next four years in terms of
property tax collections. Another way to look at this is in terms of the individual
homeowner. The city property tax on a $80,000 home is $382 [$80,000X
25%/$100X$1.91]. MTAS projections show the tax increase for this home over
the next four years, based on current trends:
Property Tax on $80,000 Home
Fiscal Year
Property Tax
2001
2002
2003
2004
2005
$382.00
$413.71
$448.05
$485.24
$525.51
Amount of Increase
$31.71
$34.34
$37.19
$40.27
The homeowner would have to spend $6,342 for consumer goods in order for the
local sales tax (based on $.005) to equal what his/her property tax increase would
be the first year. [$31.71/.005=$6,342] It is not likely that consumer purchases
will change that much in one year. If the city were to increase its local sales tax
rate by $.01, the homeowner would have to spend $3,171 for consumer goods in
order for the local sales tax to equal the property tax increase for the first year. It
should be clear that no increase in the local sales tax can be more costly than
increases in property taxes that are likely to continue.
2. Option (2) is for the City of Shelbyville to increase its local sales tax rate by
one-half cent. The City currently receives $1,110,000 in local sales taxes. Adding
one-half cent would increase this total by another $1,110,000. The city would not be
required to divide this added revenue with Bedford County.
3. Option (3) is for the City of Shelbyville to increase its local sales tax rate by
one cent. Adding one cent would increase sales tax revenue by another $2,220,000.
The city would not be required to divide this added revenue with Bedford County.
4. Option (4) is for a county-wide increase of one-half cent. This option would
require the City of Shelbyville to contribute the first half of the added sales taxes
collected to the county for education. Should this option be approved, it would add
$555,000 to the city’s local sales tax revenue.
5. Option (5) is for a county-wide increase of one cent. This option would also
require the first half of collections to be divided with the county for education.
Approval of this option would add $1,110,0000 to the city’s local sales tax revenue,
and it would add $1,110,000 to the county’s local sales tax revenue, from collections
in the City of Shelbyville.
6. Equity (fairness). The property tax is not a popular tax. Many home and
business owners pay this tax in one lump sum. A large payment means that the
owner feels the pain of the amount in a single payment. It is also not uncommon for
property taxes to be paid through monthly mortgage payments, where it is somewhat
less painful. Comparatively speaking, a sales tax is generally paid a few cents or a
few dollars at a time, and it is, therefore, not as noticeable as lump sum payments.
Even though the sales tax is a regressive tax where low income citizens pay a larger
percentage of their income on taxes for basic necessities, the average person feels that
the tax is “fair”, because everyone pays.
Coffee County and its cities levy a 2.00% local sales tax. The City of Murfreesboro
has a 2.75% local sales tax. Often people think that increasing the local sales tax rate
by .5% or 1% is a hefty increase, without realizing that the local tax can only be
applied to the first $1,600 of a sale. A $20,000 automobile sale nets the State of
Tennessee $1,200 in sales tax. Currently on such a sale the county wide local sales
tax would be $28, with $16.30 going to Bedford County schools and the remaining
$11.70 to the City of Shelbyville. A half cent increase in the local sales tax rate
would increase the local tax on this automobile to $36, with Shelbyville receiving
$18. A comparison of smaller local purchases is shown below:
Amount of Increase for Selected Purchases
Purchase 1.75%
$25
$.44
$50
$.88
$75
$1.31
$100 $1.75
$500 $8.75
2.25%
$.56
$1.13
$1.69
$2.25
$11.25
Increase Bedford County
$.12
$.06
$.25
$..125
$.38
$.19
$.50
$.25
$2.50
$1.25
Shelbyville
$.06
$.125
$.19
$.25
$1.25
Here it can be seen that a $25 purchase will net the county an additional $.06 cents
and the city an additional $.06 cents. A $100 purchase would net the county and city
an increase of $.25 cents. Should the city increase the local sales tax independent of
the county by one-half cent, the increase shown in the table above would belong to
the City of Shelbyville.
V.
Summary and Recommendations
Shelbyville’s local tax structure is heavily reliant on the property tax (61%), and there
is a wide gap between property taxes and sales taxes as to the amount of sales taxes
generated. The property tax is projected to increase significantly just to maintain normal
city services. The city needs to be proactive in its efforts to expand its property tax base
so that it can minimize increases in this very unpopular local revenue source.
Development of additional industrial property in the city is a very good way to expand
the property tax base and contribute significantly to further increasing the city’s
commercial base.
The legislature has by funding formula determined that cities should contribute
50% of their sales tax collections to education, and that is why the law requires the first
half of what is collected be contributed to schools. Certainly, if the City of Shelbyville
contributes all of any sales tax increase to the county, then its property taxes will increase
even more dramatically. The city should focus its efforts to developing a more balanced
local tax revenue base with property and sales taxes representing an approximately equal
amount.