Tennessee's Tax Holiday

Shoppers get 9.25 percent off in August as voters are asked to hike rate.

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Tennessee's sales tax holiday weekend is coming up August 3rd-5th, when there will be no sales tax on school-related items including clothing, supplies, and computers.

As holidays go, this one ranks somewhat below birthdays and Christmas, but anyone in the market for such items should take advantage of the deal because it's the equivalent of a "9 percent off" sale, or nearly $50 off the price of a $500 tablet computer.

The combined state and local general sales tax is 9.25 percent. Memphians will vote on November 2nd on a proposal to increase the local share of that — currently 2.25 percent — to 2.75 percent, the maximum allowed by law. Suburban voters will vote on referenda to increase their municipal taxes a like amount to fund municipal school districts.

The sales tax can be confusing. Consider:

• In addition to the Memphis and suburban ballot questions, the state legislature approved a bill this year that lowered the sales tax on food from 5.5 percent to 5.25 percent, effective July 1st. The sales tax on food and food ingredients is lower than the general rate on, among other things, prepared food.

• The legislature also passed a law this year requiring out-of-state retailers to tell their Tennessee customers they have to pay a "use tax" on their Internet, mail-order, or telephone purchases unless Tennessee sales tax is added to the purchase price.

• Two weeks ago, Tennessee reported a state surplus of some $540 million due to 11 consecutive months of tax collections beating budget estimates.

The debate at the Memphis City Council last week over the tax referendum gave a hint of what sort of rhetoric and exaggeration we're in for over the next three months. Councilman Shea Flinn and Mayor A C Wharton led the fight for the referendum, while Kemp Conrad and Jim Strickland opposed it. The proposed increase would raise approximately an additional $47 million a year, according to city estimates.

Flinn said that without it the city will have to cut services or raise property taxes. The half-percent increase, he said, would more than cover a projected deficit next year due to higher debt payments and lower property valuations. Business community support will be needed for it to pass.

"It's not like we're creating the sales tax, we're taking it to the legal maximum," Flinn said.

The sales tax, he agrees, is regressive, but so are budget cuts that impact city services in low-income areas. The sales tax is paid by outsiders and tourists as well as Memphians and would benefit Tourism Development Zones downtown and elsewhere.

On $1,000 worth of purchases, a half-percent more sales tax comes to an additional $5. That's the cost of a sandwich or a couple of lottery tickets, a state enterprise that is heavily supported by sales in convenience stores in low-income neighborhoods so that middle-class kids can get college scholarships. A smart shopper could save $92 on $1,000 worth of school-related purchases on the upcoming tax-free weekend.

If the suburbs get their municipal school districts paid for with a sales tax increase, then there would be no tax advantage to either side. There is, however, a sales tax advantage in Arkansas and Mississippi for those willing to spend the time and gasoline to drive there.

"The sales tax is already a major driver of people going to Arkansas and Mississippi to shop," Conrad said. "This would only exacerbate it."

Conrad said Memphis has a spending and leadership issue, not a revenue issue.

"Without reforming city government we will bore through this $47 million or $50 million or whatever it is in a couple of years," he said. "This stuff about offsetting it by reducing property taxes is bogus. If Mayor Wharton would come down and lobby as hard for some common-sense reform, we could really turn the city around. I have never seen him work so hard as he did to maximize the most regressive tax."

Strickland also said it would be better to trim government costs.

"If we bring in $47 million, it will remove all pressure to right-size government," he said. "The progress we have been making will completely disappear."

The sales tax on food and prescriptions, he said, puts a hardship on low-income people, even if the proposed increase is only half a percent.

"If it passes, there will be 13 different opinions about how to spend the money," Strickland said. "But I don't think the public is going to vote for it."

Conrad agrees the tax hike "is going to be rejected overwhelmingly."

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