City of Lawrence
City Commission
MEMORANDUM
DATE: August 21, 2007
TO: Dave Corliss – City Manager
Lawrence City Commission
FROM: Rob Chestnut
City Commissioner
CONSIDERATIONS FOR SALES TAX DISCUSSION
There has been significant discussion in recent days regarding options for additional revenue. After reviewing the information provided by Commissioner Highberger, reading comments by Assistant Professor Alexander in the Lawrence Journal World, and doing some of my own research, I wanted to highlight my thoughts on the merits of which source should be considered for additional revenue.
Total Taxes
A discussion of the impact of any tax should be considered within the framework of the total tax burden that is borne by households. In a recent study by The Tax Foundation in Washington, DC, the effective tax rate for all taxes (federal, state and local) range from 13.0% for the bottom quintile to 34.5% for the top quintile. The biggest portion of that difference is federal income taxes that are the most progressive tax as well as the larger portion of the total tax bill for households in the top four income quintiles.
The study also points out that sales and property taxes are very mixed progressively, and they tend to fall off in the highest income
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groups. This is due to the fact that sales and property taxes are not tied directly to household income.
The City has one of two options for additional revenue. We should recognize that both sales and property taxes are inherently less progressive than federal and state income taxes. However, we should also acknowledge that the City benefits directly from federal funding which is the most progressive tax structure.
The Lawrence transit system received $1.351 million in 2006 from federal sources which represents 43% of the total cost of the system. Without this source of revenue, the City would be challenged to provide the current level of public transportation.
Property Taxes
It is important to consider historic trends with property taxes that have been impacted significantly by rapid increases in assessed valuation. In the City Manager’s report on the August 14, 2007 agenda, a chart showing overall increases in residential and non-residential property values is displayed. From 2001 – 2006, the residential property values grew at a compound rate of approximately 8.6%.
I have asked for a more detail on this information to separate new construction from increases in existing housing. However, it may take some time to obtain this data. I estimate from discussions with staff that about 70% of the growth annually in residential valuation comes from existing homes. Based on this assumption, a homeowner has seen their property taxes growth 6% annually without any mill levy increase. Property tax growth has significantly outpaced inflation.
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The rapid increase in assessed value has financial impacts other than taxes. Homeowners’ insurance coverage must be increased to ensure adequate coverage for loss as the cost of replacement increases over time.
Relating these facts back to Commissioner Highberger’s analysis, I believe two conclusions can be drawn:
1) Over time an increase in property tax will be more regressive than sales tax, because assessed valuation will grow more rapidly than inflation on items subject to sales tax.
2) The impact of increases in assessed valuation extends beyond property taxes alone. Other homeowner costs increase as well, and the combined costs have had impact on the overall cost of ownership in recent years.
I agree with comments made by Commissioner Amyx regarding the impact of property tax on fixed income households. In recent years, growth in property taxes has had a profound impact on their ability to stay in their homes.
Sales Taxes
The characteristics of how taxes are levied should be considered in this situation. Any change in sales taxes levied must be approved by the taxpayers. This is in contrast to an increase in the property tax mill levy. This is a good argument for a specific set of initiatives that the public agrees are important priorities to fund as a community.
The other important characteristic of a sales tax initiative is that it can be time bounded. This is not an alternative with property taxes. Although an increase in the mill levy may have an initial intent to be temporary, future commissions will ultimately have the final
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decision about reducing the mill levy if projects have been completed that were the justification for an earlier mill levy increase.
In my mind, the most significant consideration in reviewing an increase in sales tax relates to our overall sales tax rate in comparison to surrounding communities.
In a memo dated February 12, 2007, Dave Corliss put together information regarding sales taxes levied by adjacent communities. My understanding is that staff intends on updating this information for the meeting next week. However, I still believe the information presented is relevant.
This analysis included 9 other communities within the State of Kansas. Of the 9, I would consider 6 (Unified Government, Olathe, Shawnee, Overland Park, Lenexa and Topeka) to be within a radius of Lawrence that is in our regional retail market.
Lawrence is below each of the 6 communities detailed in the memo by a range of .150% to .350% for the minimum sales tax levied within each community. In Olathe and Wyandotte County, special districts have sales taxes levied that exceed Lawrence by a range of .850% to 1.225%.
Conclusion
Any increase in taxes should be considered with great care. However, I do believe that we have challenges above and beyond our current revenue stream that must be addressed. I also believe that a sales tax initiative is the best alternative in our particular situation.
It would appear that a modest increase in sales tax would not have an adverse impact on our position within surrounding retail markets.