Raquel Alexander, KU associate professor of business, on sales and property taxes
About the numbers
The projected increase that someone would pay as the result of a new 0.5 percent sales tax is determined by using data from a national survey of spending conducted by the U.S. Bureau of Labor Statistics. The data, which was gathered by Lawrence City Commissioner Boog Highberger as part of his research into the sales tax issue, is from a 2005 survey, which was the most recent data available.
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The couch cushions aren't strewn all over City Hall yet, but city leaders are looking hard for any extra money they can find to add to future budgets.
If they thought they could find enough spare change in the furniture, they likely would start digging. But city commissioners have said they need between $5 million and $6 million per year to seriously tackle street maintenance, sidewalk projects and infrastructure improvements that would make the city more attractive to new companies that can produce jobs and new tax revenue.
That money won't be found in the couch or hidden in some obscure part of the city budget. Commissioners have been told by staff members that there are essentially only two ways to raise that kind of coin: A sales tax increase or a property tax increase.
So, put aside for the moment whether the city really needs the extra money, and ask yourself this question: Which tax increase would be better for you? You'll have to decide, but here are some basic arguments and facts tied to both taxes.
Commissioner Mike Amyx has proposed a 0.5 percent sales tax to fund streets, sidewalks and economic development-related infrastructure. It would raise between $5 million and $6 million per year. For the purpose of this comparison, we'll say it raises $5.5 million per year. Voters would have to approve the sales tax increase as part of a citywide election. A date for that hasn't been set. Lawrence now charges 7.3 percent in sales tax, with 5.3 percent of it going directly to state coffers.
What hasn't yet been proposed by commissioners is a property tax increase to raise the same amount of money. The property tax rate would have to be raised by 6.67 mills to generate the same amount of money as the proposed sales tax. A mill is $1 in tax for every $1,000 in taxable property value. (A home's taxable value is only 11.5 percent of its fair market value.)
City commissioners are scheduled to discuss Amyx's sales tax proposal at a meeting at 4 p.m. Aug. 27 at City Hall.
The low income
The No. 1 argument against a sales tax is that it is a regressive tax, meaning the poorest people pay a larger share of their income to pay the tax than rich people do.
"I'm not really too enamored with the sales tax for that reason," said Raquel Alexander, an assistant professor who teaches tax policy at Kansas University's School of Business. "Besides, Kansas' sales tax is already pretty high."
Alexander said in Kansas the situation is made worse by the fact the state does not exempt grocery sales from the sales tax.
But some are beginning to question whether a sales tax in Lawrence is any more regressive than a property tax increase. That's because Lawrence's housing prices generally are considered among the highest in the state.
"What my research has been showing me is that property taxes are really regressive, too," said City Commissioner Boog Highberger, who previously has been pessimistic about a sales tax increase. "That is the problem with our local tax structure - every way we raise money really impacts the low income."
The Lawrence factor
Here's what Highberger is talking about: A person making $12,000 per year and living in a $30,000 home would pay an extra $36 per year in sales tax - using national spending averages for that income group - under Amyx's sales tax idea. If the city were to raise the mill levy by 6.67 mills, the person would pay an extra $23 in property taxes on his or her home.
Clearly, the property tax is better for that person. But here's the question: Is anybody really living in a $30,000 home in Lawrence. A review this week of the Multi List System of homes for sale in Lawrence found none on the market priced at or below $30,000.
If that same low-income person lived in a $50,000 house, the issue of whether a sales tax or property tax is better basically becomes a wash: $36 more per year in sales tax or $38 more per year in property tax.
In general, an analysis by the Journal-World found that any household making $24,000 per year or less but living in a home valued at $75,000 or more is likely to pay more through a property tax increase than a sales tax increase.
The middle class
If you fall more into the middle class, it is a closer call. A lot of it depends on whether you have followed the general rule of thumb about living in a house that is approximately 2.5 times the amount of your household income. If you're living in a house that's less expensive than that, the property tax increase may be better for you. If you are living in a house more expensive than that, the sales tax may be the less painful way. Here's a look at some scenarios:
¢ Live in a $90,000 home and make $36,000 per year: Would pay $72 more per year in sales tax or $69 in property tax.
¢ Live in a $100,000 home and make $36,000 per year: Would pay $72 more per year in sales tax or $76 more in property taxes.
¢ Live in a $120,000 home and make $48,000 per year: Would pay $82 more in sales tax or $92 more in property tax.
¢ Live in a $150,000 home and make $60,000 per year: Would pay $102 more in sales tax or $115 in property tax.
The upper class
If you are in the upper income brackets, the analysis becomes simpler. The sales tax almost always is going to cost you less than the property tax.
"Certainly, people who have a lot of property stand to lose the most from a property tax," said Alexander of KU.
In this town, that doesn't just mean the upper income people. It also means landlords, who may be paying property taxes on multiple houses.
So, what about renters? Determining whether a sales tax or property tax is better for that group can get complicated.
Amyx and other supporters of a sales tax say renters should be plenty concerned about rising property taxes, because any increase in property taxes will get passed along in the form of higher rents.
Alexander said that's only true part of the time. She said in tight rental markets - where landlords are able to easily rent most of their units - a property tax increase is going to result in higher rents. But in a soft market - where there are more apartments than there are renters - it could be difficult for a landlord to simply increase rent to account for a tax increase. If the landlord does, he may end up with even more empty apartments.
"I don't think you can say that it automatically will be passed along," Alexander said.
Lawrence's rental market generally is considered soft, which means some renters may feel the bite of a sales tax more than a property tax increase. About half of all Lawrence residents are renters.
Amyx said he's basing his support for a sales tax, in part, on what he hears from senior citizens and retirees. He said people on fixed incomes particularly find the property tax concerning. They may be living in homes that are paid for, but have a difficult time paying for the increasing property tax bills.
"We don't want to get in a position where people are being taxed out of their homes," Amyx said. "These are people who have lived in their homes for a long time, and have paid taxes and supported the projects we have in our community for a long time. I don't ever want to get in a situation where we are taxing them out of their homes."
Alexander, though, argues that a sales tax may hurt senior citizens just as much as a property tax increase. What's different is that the sales tax hurts a little bit at a time, while the property tax is paid in a lump sum.
"When you have to write one or two large checks to pay your property taxes, it is pretty easy to see how much it went up," Alexander said.
The other big factor that Amyx likes about a sales tax is that non-Lawrence residents help pay it. He said using a sales tax to help repair streets would be wise because many non-Lawrence residents use the city streets.
"We're a destination," Amyx said, "whether it be for football games or university events or our downtown."