### PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA



## A Revenue Comparison for the City of Montgomery Versus Selected Other Alabama Cities

March 31, 2010

At the request of the Montgomery Area Ch amber of Commerce, the Public Affairs Research Council of Alabama has analyzed in detail the revenues of the City of Montgomery as they compare to the revenues of the cities of Auburn, Birmingham, Huntsville, Mobile, and Prattville. These comparisons have been c hosen purposefully for th e following two reasons.

1. Montgomery is the third largest city in Alabama, and like Birmingham, Huntsville, and Mobile it is the central ci ty of a large metropolitan area. The service demands in these highly urbanized cities are greate r than those in the smaller cities of the state, and it is appropriate to compare the revenue streams th at support municipal government in each of them.

2. Auburn and Prattville are smaller m unicipalities, but each is connected to Montgomery by proximity and commuting patt erns. Because many people who work in Montgomery have chosen to live in Auburn or Pr attville, these smaller ci ties in some respects are “bedroom” communities for Montgomery. Th is relationship makes it appropriate to compare their revenue details with Montgom ery’s, even though the service demands of suburban cities are quite di fferent from those of a metropolitan central city.

This study thus benchmarks the revenue system of the City of Montgomery against five cities divided into two subgroups: one composed of the three other me tropolitan central cities that are functionally similar to Montgomery (Birmingham, Huntsville , and Mobile) and the other composed of two cities that are competitively linked to Montgomery as residential choices within the River Regi on (Auburn and Prattville).

Our comparisons are based on revenue m easures developed by PARCA staff in municipal finance research work over the past twenty years. Regularly during these years, PARCA has compared the finances of ever y Alabama city over 20,000 population. In the process, we have developed met hods for comparing city finances that we believe result in “apples-to-apples” comparisons. Our data are base d on city financial reports, with adjustments made so that, to the extent possi ble, every city is treated the sa me in the various categories of revenue and expenditure. We wo rk with city finance director s continually to improve the

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 1methods and to ensure that the adjustments ar e made accurately. Our purpose is to report the numbers objectively and fairly so that every community can ev aluate its comparative position accurately and make whatever improvement s its people feel are appropriate.

For this special report, we have used data from the fiscal 2008 annual fina ncial reports that have become available in recent months, supplemented by information provided on request by the various city finance directors. We also have included informati on on current tax rates in all of these cities that we believe will be useful for your consideration.

PARCA studies include revenue s that cities place in “governmental” funds, which are the funds normally budgeted by city councils -- th e general fund as well as special revenue, debt service, and capital projec t funds. We exclude revenue in “enterprise” funds except for transfers to governmental funds. Thus, if a city transfers revenue from a sewer utility or a golf course to the general city budget, we count that transfer; but we do not in clude all of the sewer revenue and expenditure in our totals. In part this separation is di ctated by the different accounting methods for these two ty pes of funds. The results of our studies are presented in per-capita terms, so that a city of 200,000 can be compared direct ly with another city that has only 20,000 residents.

In this report, we look at four issues that should be of interest to policy makers in Montgomery:

• First, we look at the revenue totals for all of the cities in th e comparison. How does Montgomery compare in terms of revenues availa ble to provide municipal services, as well as tax rates and other featur es of its revenue system?

• Second, we look at each of the major sources of revenue in the cities compared. How does Montgomery compare in its use of each source?

• Third, we look at combined city, county, a nd school tax rates for each tax source. These are the rates that are most important to the taxpayer. Suppose a city's property tax rate is low, but the property tax rates for the county and school system are high. In such a situation, the city would have le ss room to adjust its tax rate than a city-to-city comparison alone would indicate.

• Finally, we look at the percentage of reve nues derived from the four major revenue sources. This gives a picture of revenue ba lance that complements the rate comparisons and enables us to see possible options for change in better pe rspective. The report ends with some observations drawn fr om the information presented.

An Overview of City Revenues

The chart below shows how the City of Montgo mery compares to the five other cities in terms of governmental revenue per capita. These figures show total governmental revenues for fiscal year 2008, adjusted to remove school m illages in some cases (as explained later in the report), and divided by the Census estimate of th e number of residents in the city. The percapita revenues that result from this division allo w us to compare the cities regardless of their size. The chart shows Montgomery in red, other central cities in blue, and suburban cities in

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 2

### $1,195

$1,080

$895 $1,869

$1,515

$1,330 Birmingham

Huntsville

Mobile

Montgomery

Auburn

Prattville

$0 $500 $1,000 $1,500 $2,000 Revenue Per Capita 

### Adjusted City Governmental Revenue, FY 2008

orange. This allows us to compare Montgomery ag ainst all five cities and also against the two types of benchmarks in the comparison group.

Montgomery’s city government operates on less revenue per resident than any of the other central cities compared. Service demands in Montgomery are likely to be similar to those in Huntsville, Mobile, and Birmingham, gi ven the similar populations and urban status of the three cities; but in FY 2008 Mobile had 11 % more revenue per resident, Huntsville 27% more, and Birmingham 56% more, on an adjusted basis.

The two suburban cities in th e comparison likely have lower levels of service demand than the central cities, and thus can be expected to show lower levels of revenues for municipal purposes. Auburn’s revenues, adjusted for school millages contained in the city financial statements, were 10% lower than Montgomery’s, and Prattville’s were about 25% lower.

To put these numbers in perspective, a di fference of $100 in per-capita revenue equals $20 million in total revenues for a city of 200,000 people. Using this yardstick, the annual revenue advantage of the three other central cities over Montgomery is about $135,000,000 for Birmingham, $64,000,000 for Huntsville, and $27,000,000 for Mobile.

Assuming that the four citie s spend their money in comparable ways, these revenue advantages mean that the other three central ci ties are financially capa ble of providing more and better services to their citizens. This of c ourse does not mean that they actually do so. But the fact that Montgomery is on the low end of the revenue invested in running Alabama’s big metropolitan cities may indicate that it is a strugg le to provide the resources needed to finance adequate services.

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 3On the other hand, comparisons with the two nearby suburban cities indicate that Montgomery faces stiff competition in its own ge ographical area to keep service costs down. The City of Auburn operates on governmental re venues that would be about $23 million lower than Montgomery if the two cities were the same size, and Prattville operates at a level that would be $60 million lower using the same assu mption. While the service demands for police and fire protection, roads, and other services are far greater in Montgomery and other central cities than in a suburban environment, it is of ten difficult for taxpayers to see beyond a straight comparison of their revenue burdens ve rsus those in other nearby cities.

The overall revenue situation shown in the chart on the previous pa ge thus indicates a double-bind: as a central city, Montgomery ha s very limited revenue availability, raising questions about adequacy in financing services; but its competition with local suburban cities creates constraints on its ability to raise revenues.

Obviously the next question is, what acc ounts for these differences? The following sections look at how the six cities compare in te rms of revenue raised fr om particular sources:

• Sales and excise taxes. We have broken these down into five types – general sales and use taxes, rental/lease taxes, lodging taxes, gasoline taxes, and tobacco taxes.

• Property tax.

• Occupational tax.

• Business licenses.

• Intergovernmental revenues. These consist largely of federal grants, shared state taxes, and utility transfers.

• Fees, permits, and fines.

• Interest and miscellaneous revenues.

General Sales and Use Taxes

General sales and use taxes are the major revenue source for most Alabama cities, typically applied at a rate of three to four percent and producing about forty percent of all governmental revenues. These figures do not include excise taxes on gasoline, tobacco, alcoholic beverages, rentals, a nd lodging, which are normally levi ed separately. The chart and table below show how Montgomery compares with the other cities on general sales tax

revenue.

The chart shows that Mobile , Huntsville, and Birmingham collect substantially more revenue from the general sales tax than Montgome ry, while Prattville an d Auburn collect less. This pattern reflects the double- bind mentioned above. Table 1 provides some explanation for the differences in revenue collections, by co mparing the cities on f our related measures:

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 4

### $463

$405

$375 $735

$722

$570 Mobile

Huntsville

Birmingham

Montgomery

Prattville

Auburn

$0 $200 $400 $600 $800 Revenue Per Capita 

## City General Sales Tax Revenue, FY 2008

• The percentage of each city’s revenue th at is derived from the general sales tax. Mobile is more heavily dependent on the sales tax (55% of revenue) than any other major city in Alabama except Doth an. Birmingham and Auburn, on the other hand, have occupational taxes that raise subs tantial amounts of money; the general sales tax raises only a third of ad justed revenue in these cities, which is well below the average. Montgomery’s 39% is typical for Alabama cities.

• The growth rate for general sales tax revenue. Montgomery’s 58% sales tax growth rate from 2000 to 2008 was higher than the increase for this source in the other central cities compared, but lower than sales- tax growth rates in Prattville and Auburn.

• The sales tax rate. Mobile and Birmingham have high municipal sales tax rates of 4%, followed by Montgomery and Huntsville at 3.5%. Prattville has the lowest city sales tax rate, at 2.5%, a nd Auburn is at 3%.

The tax rate and revenue growth comparisons indicate that Prattv ille and Auburn have a dual advantage over Montgomery: lower tax ra tes and higher rates of revenue increase. Among the central cities, Montgomery compares well in that it has a relati vely low tax rate and higher revenue growth over time.

• The sales tax base. Huntsville was able to raise $206 per capita for each percent of the general sales tax rate, i ndicating that it has the larg est sales tax base among these four cities. Mobile was not far behind, at $184; and Prattville ranked third, at $162. Montgomery's sales tax base was well below th ese, at $132 per capita per percent of tax
rate.

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 5PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 6 The general sales tax rate commonly does not apply to all kinds of purchases, and differences in the detailed rates on particular kinds of transactions may explain some of th variation in revenue collections per percent of general t e

ax ra te. Table 1-A provides more details of the sales tax rate structure in these six cities.

ales at l

ontgomery. hus, competition from the neighboring ci ties is a factor to be considered.

Prattville 2.50% 0.50% 0.50% 0.75% 2.50% • Details of sales tax rates. Auto purchases are signifi cant components of the sales tax base. Mobile, Birmingham, and Huntsville all tax auto purchases at 50% of the rate applied to general sales; for example, Mobile taxes auto sales at 2% and general s 4%. Montgomery has an auto tax rate that is only 36% of the general rate for al purchases (1.25% versus 3.50%). The deep er discount for autos contributes to Montgomery’s low ranking on revenue per percen t, per capita in Table 1. However, Auburn and Prattville both apply even lower sales tax rate s to autos than M T

TABLE 1-A DETAILED SALES TAX RATES General Auto Farm Mfg. Vending Tax Tax Tax Machine Tax City Rate Rate Rate Tax Rate Rate

Mobile 4.00% 2.00% 2.00% 2.00% 4.00% Birmingham 4.00% 2.00% 2.00% 2.00% 4.00% Huntsville 3.50% 1.75% 3.50% 0.00% 3.50% Montgomery 3.50% 1.25% 1.25% 1.75% 3.50% Auburn 3.00% 1.10% 1.50% 1.50% 2.19% TABLE 1 GENERAL SALES TAX REVENUE 2008 Tax Percent Percent Tax 2008 Revenue Revenue of 2008 Increase Rate Per Percent City Per Capita Revenue '00-'08 2008 Per Capita

Mobile 735 $ 55% 30% 4.00% 184 $ Huntsville 722 48% 55% 3.50% 206 Birmingham 570 30% 25% 4.00% 142 Montgomery 463 39% 58% 3.50% 132 Prattville 405 45% 64% 2.50% 162 Auburn 375 35% 73% 3.00% 125PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 7 Rental/Lease Taxes

Rental/lease taxes are sales taxes on the rental or lease of tangible personal pro Alabama typically such taxes are add-ons that are enacted and reported separately from the general sales tax. All five of the cities co mpared with Montgomery in this study had rental/lease taxes in FY 2008, as shown in the chart below. Birmingham collected $25 per capita from this source; Mobile was not fa r behind, and Huntsville also had sizeable perty. In

rental/lease revenues. Auburn and Prattville ra ised much lower amounts from this source. Montgom

e, accounting for its giant increase). Mo bile and Montgomery have the highest general tax rates, at 4%, a point highe r than Birmingham and Huntsville ; the suburban cities are at

e

Montgomery estimated its rental/lease tax reve nue for 2009 at $1.8 million for nine months of ery enacted a rental/lease tax in 2009, a year later than these comparisons.

Table 2 provides detailed measures for rent al/lease taxes, and for comparative purposes we have added Montgomery to the bottom of the table by showing its 2009 rates. For Birmingham and Mobile, this tax accounted for a bout 1.5% of city revenue in FY 2008, but for the other cities it raised only about 1% of adju sted revenues. Percentage increases were very small for the central cities but very large in the two suburban cities (Auburn repealed the tax for a tim

2.5%.

Auto rentals/leases are an important part of this tax base, and the tax rate is often discounted for this type of transa ction. The table shows auto tax ra tes. In Mobile, auto rentals and leases are taxed at the full 4%; Birmingham has a very low 0.75% rate due to competitiv pressures in its metropolitan area. Montgomery and Huntsville are at 1.5%, while the suburban cities have somewhat lower rates on autos. The last column of the table shows the revenue raised from the rental/lease tax for each pe rcent of the general ta x rate. The City of 

### $0 $10

$7 $25

$23

$17 Birmingham

Mobile

Huntsville

Auburn

Prattville

Montgomery

$0 $5 $10 $15 $20 $25 $30 Revenue Per Capita 

## City Rental/Lease Tax Revenue, FY 2008PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 8 collections, which amounts to about $3 per percent, per capita. Once fully in place, this tax should yiel d from $4 to $5 per percent, per capita , based on the data from comparable cities in

is table.

odging Taxes th

L

, nmental units. The FY 2008 revenue yields for lodging taxes are shown in the chart below. All of the cities in the comparison have lo cal lodging tax revenue except Birmingham which by ordinance has allocated all of its lodging tax revenue to other gover

Table 3 provides detailed measures for lodgi ng taxes in these cities . The tax raises 2- 4% of adjusted city revenue, w ith Prattville and Aubur n being on the high end of this range. Prattville and Auburn have shown the highest increases in revenue, but Montgomery has seen 

### $0 $27 $37

$27 $45

$34 Mobile

Prattville

Huntsville

Auburn

Montgomery

Birmingham

$0 $10 $20 $30 $40 $50 Revenue Per Capita 

### City Lodging Tax Revenue, FY 2008 TABLE 2 RENTAL/LEASE TAX REVENUE 2008 Tax Percent Percent General Auto Linens 2008 Rev. Revenue of 2008 Increase Tax Tax Tax Per Percent City Per Capita Revenue '00-'08 Rate Rate Rate Per Capita

Birmingham 25 $ 1.4% -18% 3.00% 0.75% 3.00% 8.42 $ Mobile 23 1.7% -33% 4.00% 4.00% 4.00% 5.80 Huntsville 17 1.1% 16% 3.00% 1.50% 3.00% 5.56 Auburn 10 0.9% 899% 2.50% 1.25% 2.50% 3.84 Prattville 7 0.8% 172% 2.50% 1.00% 2.50% 2.82 Montgomery* --- --- --- 4.00% * 1.50% * 4.00% * --- *2009 ratesPUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 9 the most growth among the central cities in this comparison. Montgomery and Prattville hav the highest tax rates (8.5%), w ith Mobile not far be hind. Mobile and Hunt sville raise about $5.60 per capita, per percent of ta x rate; Huntsville’s high ranking may be due in part to the fact that it has created a surcha rge of $1.00 per room-ni ght that adds to the rate shown in the table. Auburn and Montgomery are significantly lower on the highest tax rates (8.5%), w ith Mobile not far be hind. Mobile and Hunt sville raise about $5.60 per capita, per percent of ta x rate; Huntsville’s high ranking may be due in part to the fact that it has created a surcha rge of $1.00 per room-ni ght that adds to the rate shown in the table. Auburn and Montgomery are significantly lower on e

the reve nue raised per percent of tax rate, which is a rough measure of the size of the tax base.

asoline Taxes G

All of the cities in the comparison have local gasoline taxes except for Birmingham where there is a countywide gasoline tax of one penny per gallon shared among the local governments in the county. The FY 2008 data for gasoline taxes are shown in the chart below. Prattville and Mobile raised $27 per capita from this source, follow ,

ed closely by Montgomery. Auburn and Huntsville received much less from the gasoline tax.



### $0 $26 $27

$9 $27

$6 Prattville

Mobile

Montgomery

Auburn

Huntsville

Birmingham

$0 $5 $10 $15 $20 $25 $30 

### City Gasoline Tax Revenue, FY 2008

Revenue Per Capita TABLE 3 LODGING TAX REVENUE 2008 Tax Percent Percent Tax 2008 Revenue Revenue of 2008 Increase Rate Per Percent City Per Capita Revenue '00-'08 2008 Per Capita

Mobile 45 $ 3.4% 11% 8.00% 5.63 $ Prattville 37 4.0% 176% 8.50% 4.30 Huntsville 34 2.2% 56% 6.00% 5.59 Auburn 27 4.1% 288% 7.00% 3.81 Montgomery 27 2.3% 111% 8.50% 3.22 Birmingham --- --- --- 3.00% ---TABLE 4 GASOLINE TAX REVENUE 2008 Tax Percent Percent Tax 2008 Revenue Revenue of 2008 Increase Rate Per Penny City Per Capita Revenue '00-'08 2008 Per Capita

Prattville 27 $ 3.0% 0% 0.04 $ 6.73 $ Mobile 27 2.0% 4% 0.04 6.64 Montgomery 26 2.2% -4% 0.04 6.51 Auburn 9 0.8% 14% 0.02 4.43 Huntsville 6 0.4% 24% 0.01 6.07 Birmingham --- --- --- --- ---

Table 4 shows that this revenue source accounts for around 2-3% of adjusted city revenue in Montgomery, Prattville, and Mobile, but less than 1% in the other cities compared. Mobile and Montgomery levied the highest m unicipal tax rates on gasoline among the cities shown, at four cents per gallon. Prattville, Mobile, and Montgomery all collected revenue in the $6.50 range, per penny, per capita. Hunt sville and Auburn likely suffer locational disadvantages, since they are located “off the beat en path” to some degree. However, they did show the highest of the anemic growth rates for this source.

Tobacco Taxes

All of the cities in this comparison have tobacco taxes except Birmingham. Jefferson County has a countywide tobacco tax that is sh ared by local governments. While local taxes may be levied on all tobacco pr oducts, the rates are normally compared on the basis of a pack of twenty cigarettes, which is what we have done. The FY 2008 data for the six cities are shown in the chart below. Mobile raises by far the most revenue from this source, at $14 per



### $0 $8

$4

$2 $14

$8 Mobile

Montgomery

Huntsville

Prattville

Auburn

Birmingham

$0 $4 $8 $12 $16 Revenue Per Capita 

### City Tobacco Tax Revenue, FY 2008

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 10capita. Montgomery and Huntsville are a dist ant second, at $8 per cap ita. Prattville and Auburn raise far less.

Table 5 provides details for this tax source. Tobacco taxes generate one percent or less of adjusted revenues in all of the cities compared, and revenue growth rates are generally small or nonexistent except where rate increases have occurred. Mobile has the highest tobacco tax rate, followed by Montgomery and Huntsville in double digits. Prattville and Auburn have much lower tax rates, and Auburn’s tax applies only to cigarettes. The tax raises from 67 to 92 cents per capita for each penny of tax rate in the cities with broad-based coverage of tobacco products.

TABLE 5 TOBACCO TAX REVENUE 2008 Tax Percent Percent Tax 2008 Revenue Revenue of 2008 Increase Rate Per Penny City Per Capita Revenue '00-'08 2008 Per Capita

Mobile 14 $ 1.0% 249% 0.15 $ 0.92 $ Montgomery 8 0.7% 477% 0.12 0.67 Huntsville 8 0.5% 371% 0.10 0.77 Prattville 4 0.5% -26% 0.05 0.84 Auburn 2 0.1% -18% 0.04 0.38 Birmingham --- --- --- ---

Property Taxes

Property taxes are traditionally a mainstay for local governments, but few Alabama cities rely heavily on this source. The chart below shows the revenue yield for these six cities from the property tax. Financial reports fo r Auburn, Huntsville, and Birmingham include property tax revenue for schools as well as th e city government, and the chart shows an estimated breakout of the two t ypes of revenue. With the ad justment to remove school millages, Montgomery ranks third among the six ci ties in property tax revenue per capita for city purposes, ahead of Auburn, Prattville, and Mobile.

The amounts adjusted out of city revenues in this chart also have been extracted from the comparisons in other parts of the report fo r the three cities affect ed. The school millages deducted were levied as city taxes, and for that reason are included in the city financial statements; they do not constitute all the property tax revenue for the schools, only the part that happens to be routed through the city’s accounts. This property tax revenue is irrelevant to our comparison, and it gives only a partial picture of school revenues as well. Removing these revenues gives a more accurate comparison of the property taxes used for city purposes.

Table 6 contains detailed measures for the property tax revenue s ource. Looking at the “City Tax Mills” column, we see that Birmingha m has the highest property tax rate for city purposes, and that Huntsville, Montgomery, and A uburn are relatively close to each other in property tax support for the city budg et. Prattville and Mobile ha ve lower property tax rates. Montgomery’s revenue yield of $12 per capita, per mill of tax rate is typical of the group.

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 11

### $149

$186

$0 $116

$70 $36

$98

$0 $238

$195

$69 Birmingham

Huntsville

Montgomery

Auburn

Prattville

Mobile

$0 $100 $200 $300 Revenue Per Capita School 

### City Property Tax Revenue, FY 2008

TABLE 6 PROPERTY TAX REVENUE 2008 Tax Percent Percent City School 2008 Revenue Revenue of 2008 Increase Tax Tax Per Mill City Per Capita* Revenue '00-'08 Mills Mills Per Capita

Birmingham 238 $ 13% 66% 18.7 2.8 13 $ Huntsville 195 13% 108% 13.0 6.5 15 Montgomery 149 12% 57% 12.5 - 12 Auburn 116 11% 127% 10.0 16.0 12 Prattville 70 8% 87% 7.0 - 10 Mobile 69 5% 20% 8.0 - 9 *Adjusted for school millages

Occupational Taxes

Among Alabama’s large cities, six have occ upational license taxes that mainly are levied on payroll income (Birmingham, Be ssemer, Mountain Brook, Auburn, Opelika, and Gadsden). The tax rates range from 0.5% in Mountain Brook to 2% in Gadsden, with a 1% rate being most common. A local legislative act prohibits such a tax for the City of Montgomery (Act 457 of 1957), and Montgomer y County is prohibi ted from levying an occupational tax by a separate legislative act (A ct 89 of 1975). An attempt to use the county’s school taxing authority to levy such a tax was voided by the Alabama Supreme Court in recent years, and House Bill 49 in the current legisl ative session proposes a vote on a constitutional amendment to prohibit occupati onal taxes in Autauga, Elmore, and Montgomery counties. These legal considerations, and the sentiments they reflect, pose a stiff challenge to the adoption of an occupati onal tax in Montgomery.

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 12Two of the cities in this comparison have occupational taxes, as shown in the chart below. For both Birmingham and Auburn, the occ upational tax is a major source of revenue. Table 7 provides detailed measur es for the occupational tax in th e two cities. Each has a 1% tax rate, which raised $336 per capita in Birmingham and $146 pe r capita in Auburn during FY 2008. An occupational tax of 1% in Montgomer y would raise about $30 million a year if its yield were equal to that in A uburn. It would be more likely to raise a larger amount, given the higher employment base of the capital city; at $240 per capita, per percent of tax rate (the average of the Auburn and Birmingham tax yields ), an occupational tax of 1% in Montgomery would raise over $48 million per year. A “unit yield” of $300 per capita (near Birmingham’s level) would raise about $60 million per year.



### $146 $336 Birmingham

Auburn

Huntsville

Mobile

Montgomery

Prattville

$0 $100 $200 $300 $400 Revenue Per Capita 

### City Occupational Tax Revenue, FY 2008

TABLE 7 OCCUPATIONAL TAX REVENUE 2008 Tax Percent Percent Tax 2008 Revenue Revenue of 2008 Increase Rate Per Percent City Per Capita Revenue '00-'08 2008 Per Capita

Birmingham 336 $ 18% 39% 1.00% 336 $ Auburn 146 13% 76% 1.00% 146 Huntsville --- --- --- --- --- Mobile

--- --- --- --- --- Montgomery

--- --- --- --- --- Prattville

--- --- --- --- ---

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 13Business License Taxes

Business licenses are a major revenue source for most Alabama cities, often raising about the same amount of revenue as property taxes. The rates for business licenses are complex, may vary by type of business, and often ar e categorized differently from city to city. Thus the tax rates cannot be summarized in the same way as the taxes discussed above, and our best measure of the tax burden is simply the amount of money raised per capita. The FY 2008

data for the comparison cities are shown in the chart below. 

### $133

$104 $182 $350

$197

$106 Birmingham

Mobile

Montgomery

Prattville

Huntsville

Auburn

$0 $100 $200 $300 $400 Revenue Per Capita 

### City Business License Revenue, FY 2008

Montgomery’s business license revenue ranked third among the comparison group, but the revenue per capita was close to that in Mo bile. Birmingham collects far more from this source than the other cities in the comparison. Huntsville’s reve nues are low for a central city, but this probably is due to the particular features of its economy that rest rict the tax base. The only way to know with certainty how much these data are affected by the business-license rate structure, and how much by the si ze of the business-license tax base, is to compare the business license rate schedules direct ly by type of business.

Table 8 presents the details for business license revenues. Bu siness license revenue represents 19% of Birmingham’s revenue total, and 15% of revenues in Mobile, Montgomery, and Prattville. It is a much smaller percen tage of revenue in Auburn and Huntsville. Montgomery’s 51% increase in business license revenue from 2000 to 2008 was higher than in Mobile and Huntsville, but lower than in Bi rmingham, where these revenues doubled over the period.

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 14TABLE 8 BUSINESS LICENSE REVENUE '08 Rev. Percent Percent Per of 2008 Increase City Capita Revenue '00-'08

Birmingham 350 $ 19% 107% Mobile 197 15% 44% Mont g omer y 182 15% 51% Prattville 133 15% 81% Huntsville 106 7% 43% Auburn 104 10% 32%

Intergovernmental and Utility Revenues

Cities collect intergovernmental revenues fr om federal and other grants, payments in lieu of taxes, shared taxes that ar e levied at the state or county level, and utility transfers from locally-owned utilities. Federal grants, state gasoline tax revenue, and tr ansfers from utilities and other local enterprises are commonly the majo r factors in this revenue category. Because some federal grants are project-specific, there can be large changes of a positive or negative direction in intergovernmental re venue from year to year. The FY 2008 data for the cities in this study are shown in the chart below.$14 

### $115

$60

$46 $100 $136

$194

$119 Huntsville

Birmingham

Montgomery

Mobile

Auburn

Prattville

$0 $50 $100 $150 $200 $250 Revenue Per Capita Intergovermental Utility 

### City Intergovernmental & Utility Revenue, FY 2008

Huntsville received the largest amounts in FY 2008 from these two sources combined. While the intergovernmental revenue amounts for Huntsville, Montgomery, and Mobile were

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 15similar, Huntsville received ma jor amounts in transfers from its utilities. Birmingham received the largest amounts from intergove rnmental sources, due not only to federal grants but also to the large amounts of countywide tax-sharing mandated by local acts governing tobacco and gasoline taxes. Auburn and Prattville received only about half as much revenue from these sources as the four central cities.

TABLE 9 INTERGOVERNMENTAL REVENUE '08 Rev. Percent Percent Per of 2008 Increase City Capita Revenue '00-'08

Huntsville 236 $ 16% 47% Birmingham 194 10% 29% Mont g omer y 129 11% 47% Mobile 119 9% 45% Auburn 65 6% 207% Prattville 50 6% 5%

Fees, Permits, and Fines

Cities collect fees and permit revenues from a number of persons and businesses, and they collect fines from viola tions of city ordinances. Th e chart below shows the revenue derived from these sources in FY 2008 (the data exclude business license tax revenues, which have been discussed already). Auburn receiv ed the largest amounts from these sources.



### $50 $110 $23

$17 

### $168

$114 $20

$20

$26 $135

$73

$30 Auburn

Montgomery

Huntsville

Prattville

Birmingham

Mobile

$0 $50 $100 $150 $200 $250 Revenue Per Capita Fees Fines 

### City Fees, Permits, & Fines Revenue, FY 2008

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 16Montgomery ranked second, due mainly to its la rge revenues from fines, which were double those in the other cities. Fee a nd permit revenues vary in part due to a city’s policies on how to pay for garbage pickup. Some cities finance this service in whole or in part through general fund revenues, while others charge a garbage fee to cover all or part of the service. Mobile, which has no garbage fee, ranked last in this comparison becaus e of that policy.

Interest and Miscellaneous Revenues

Cities receive interest on their cash deposits and collect miscellaneous revenues from a number of small sources. The chart below shows the amounts received from these sources in FY 2008. Birmingham ranked first. It has a sinking fund for capital projec t financing that is funded by an earmarked property tax; this fund normally maintains large cash balances and produces large interest earnings. Montgomer y ranked second on these revenue sources. Prattville ranked last, due to very low interest earnings.



### $31 $19

$14

$25 

### $22

$7 $28

$24

$22 $34

$16

$14 Birmingham

Montgomery

Mobile

Huntsville

Auburn

Prattville

$0 $10 $20 $30 $40 $50 $60 $70 Revenue Per Capita Interest Misc. 

### City Interest and Miscellaneous Revenue, FY 2008

Overall Local Tax Rates

It is important to consider all local tax rates, not just those for municipalities. A taxpayer in the City of Montgomer y is likely to care more about overall tax rates than about the separate tax rates for the city, c ounty, and school system. If the overall rate of a particular tax is high in Montgomery County, it will be hard to ra ise the city's tax rate even though it may be below that for other cities. The table below shows how Montgomery compares on overall local tax rates, including city, count y, and school taxes. State ta xes apply equally in every community and are igno red in the comparison.

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 17PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 18 The comparisons by tax reveal the following competitive positions for taxpayers in the City of Montgomery:

• Montgomery and Birmingham are highest in ove rall local sales tax rates for general transactions, at 6%; the competitive gap with Prattville and Auburn is two percentage points. On auto sales, Montgomery’s 1.583% overall rate is lo west among the “Big Four” but is marginally higher th an Prattville and Auburn.

• Montgomery ranks second to Mobile in overa ll local rental/lease tax rates for general transactions, at 4%. On auto rentals/leas es, Montgomery’s 1.5% overall rate is third among the “Big Four” cities but is marginally higher than Prattville and Auburn.

• Montgomery’s overall local tax rate of 8.5% on lodgings ranks third among the “Big Four” cities (behind Birmingham and Mobile), and there is no competitive gap with the neighboring cities.

• Montgomery’s overall local rate on gasoline ($ 0.05 per gallon) ranks second to Mobile but is equal to Prattville. There is a gap of three cents between Montgomery and Auburn.

• Montgomery ranks third on overall local tobacco taxes ($0.12 per pack) and is substantially higher than both Prattville and Auburn.

• Montgomery is far below every other city compared, except Prattville, on local property tax rates (30 mills).

•

• Like three of the five cities in the co mparison, Montgomery has no local occupational
taxes.

Reliance on Major Tax Sources

All of the cities in this comparison derive most of their revenue from four major tax bases -- sales, property, income, and business licenses. Table 11 shows the percent of adjusted governmental revenue derived from these four big sources in each city. Montgomery and Huntsville rely least on these sources, at 72% of total revenue; the ot her four cities derive three-fourths or more of revenue s from them. These reliance data , in conjunction with the rate

TABLE 10 OVERALL LOCAL TAX RATES Sales Sales Rental/ Rental/ OccupaTax Tax Lease Lease Lodging Gasoline Tobacco Property tional City General Auto General Auto Tax Tax Tax Tax Tax

Montgomery 6.0% 1.583% 4.0% 1.50% 8.5% 0.05 $ 0.12 $ 30.0 ---

Birmingham 6.0% 2.750% 3.0% 0.75% 10.0% 0.01 0.04 63.0 1.0% Mobile 5.0% 2.500% 5.0% 5.00% 10.0% 0.06 0.35 57.0 --- Huntsville 4.0% 2.000% 3.5% 1.75% 8.0% 0.04 0.13 51.5 --- Prattville 4.0% 1.100% 2.5% 1.00% 8.5% 0.05 0.05 24.5 --- Auburn 4.0% 1.350% 2.5% 1.25% 9.0% 0.02 0.04 47.5 1.0%comparisons in Table 10, provide a good sense of any revenue options that might be available to Montgomery.

Each of these categories of ta xes has its advantages and disadvantages. Experts often recommend a balanced tax system in order to avoid over-dependence on one source, improve fairness, and maintain competitiveness. Any anal ysis of options for the City of Montgomery should take note of such considerations. The following sections examine the reliance of this comparison group on major tax sources.

TABLE 11 RELIANCE ON MAJOR TAX BASES Sales & Business OccupaExcise Property License tional SubCity Taxes Taxes Taxes Tax total

Mobile 63% 5% 15% --- 84% Birmingham 32% 13% 19% 18% 81% Prattville 54% 8% 15% --- 76% Auburn 41% 11% 10% 13% 75% Huntsville 52% 13% 7% --- 72% Montgomery 44% 12% 15% --- 72%

Sales and excise taxes . All of the cities in the comp arison rely more heavily on sales and excise taxes than on any other source of revenue. About 44% of Montgomery's revenue comes from general sales, lodging, gasoline, a nd tobacco taxes; with implementation of the rental/lease tax, this total should increase by ab out one percentage point in the future.

Table 12 shows the percent of revenue derived from the various types of sales and excise taxes in each city. Montgomery ranks fourth, drawing a smaller percentage of its revenue from these taxes than do Mobile, Prattville, and Huntsville. Birmingham and Auburn rely much less on sales and excise taxes, primar ily because they have occupational taxes.

Referring back to Table 10, we can see that Montgomery's sales and excise tax rates typically are in the middle of the “Big Four” citie s, but are generally higher than in Auburn and Prattville.

Sales and excise taxes have certain advantages for cities . They are strongly tied to economic activity, and in a growing economy they generate increasing revenues. They can be levied by ordinance, without voter approval. Th ey take effect quickly, and are relatively easy to administer. For many transactions, they pl ace little burden on the purchaser and therefore are relatively invisible to taxpayers.

However, sales and excise taxes also have disadvantages. The revenue growth they produce is cyclical, rising and falling with th e economy, which can create budgetary problems. Sales taxes tend to be "regressi ve," creating a larger burden on low-income consumers, who spend more of their income on items normally included in the sales tax base. They also are burdensome on high-value transactions such as autos, where the amount of the tax becomes

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 19substantial. When sales tax rates become too high, economic activity tends to move to where the rates are lower.

TABLE 12 RELIANCE ON SALES & EXCISE TAXES General Lodging Rental/ Gasoline Tobacco Sales &

Sales Tax Lease Tax Tax Excise City Tax Tax Taxes

Mobile 55% 3.4% 1.7% 2.0% 1.0% 63% Prattville 45% 4.0% 0.8% 3.0% 0.5% 54% Huntsville 48% 2.2% 1.1% 0.4% 0.5% 52% Montgomery 39% 2.3% --- 2.2% 0.7% 44% Auburn 35% 4.1% 0.9% 0.8% 0.1% 41% Birmingham 30% --- 1.4% --- --- 32%

While Table 12 shows Montgomery with belo w-average reliance on sales and excise taxes, opportunities to increase these taxes in Montgomery are limited by the rate comparisons shown in Table 10. Montgomery’s overall sale s tax rate is high. Its reduced sales and rental/lease rates for auto transactions are gener ous in percentage terms, but the actual rates on these transactions are higher than in the two neighboring cities. The lodging tax has a relatively high rate in the Montgomery “nei ghborhood,” but is low in comparison with Birmingham and Mobile; the data in Table 3 indicat e that an increase of 1% in the lodging tax rate would raise about $650,000 per year. There w ill be some natural growth in revenue from the rental/lease tax, which should provide $1 milli on or more each year above the current-year revenue estimate as it comes fully online, based on the values from other cities shown in Table 2.

Property taxes . Montgomery depends on the propert y tax for only 12% of its revenue, as shown in Table 11. This is not atypical in pe rcentage terms, but it re presents a typical share of a relatively small revenue base. Combined local property tax rates in Montgomery are far below those in the other major metropolitan areas of Alabama, as shown in Table 10.

The property tax has certain advantages. It is a stable producer of revenue, since property values are less subject to economic fluctuation than sales or income. It is a tax that draws from all kinds of taxpaye rs, both individuals and businesses. Sometimes it is claimed that renters pay no property tax, but it seems clear that the renter shares the burden of the tax with the landlord even though the latter actually pays th e bill. The property tax is particularly suited to municipal services and schools, since high-quality serv ices of these types tend to benefit property values and make the tax payment an investment for the taxpayer.

On the other hand, the property tax has disa dvantages. It is more difficult to enact, because of the three-step process required by the Alabama constitution. Any property tax proposal would have to be approved by the City Council, the State Legisl ature, and the voters. The tax is slow to take effect once adopted, since it is assessed and collected only once each year. And there are fairness considerations, si nce different kinds of property are taxed at different ratios to market value.

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 20PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 21 Montgomery's low percentage of dependence on the property tax and its low property tax rates make it appropriate for the City to consider additional prope rty taxes, which would improve tax balance without hurting competitiveness except with respect to Prattville. The property tax is particularly appr opriate for municipal and school services, where the investment of the tax revenue should lead to improvements in property value. The datain Table 6 indicate that each additional mill of property tax in the City of Montgome ry would raise about $2,400,000 per year in revenue.

Occupational (or income) taxes . An occupational tax is technically a license tax levied on the employer and measured by payroll in come; in effect, however, it is much like a local income tax. Like most cities in Alabam a, Montgomery has no occupational tax. In terms of balance, then, the City raises none of its revenue from its personal income base. Birmingham and Auburn, the two cities in this comparison with occupa tional taxes, raise 13- 18% of revenues from this source, which en ables them to reduce dependence on sales and excise taxes.

Occupational taxes have several advantages, particularly for metropolitan central cities like Montgomery. They are based on personal in come, which is the tax base that is most responsive to economic growth. They are relati vely easy to administer, since employers have experience with payroll taxes. They are levied on the income of all individuals who work in the city, regardless of residence. Large central cities have high percen tages of commuters who use the services and facilities of the city government, and this tax allows the city to obtain a contribution for those services.

An occupational tax can be levi ed by city ordinance except where a local legislative act or constitutional amendment prohibits it. As di scussed above on page 12, there are significant legal barriers of this type in Montgomery, and these undoubtedly reflect sentiment that is opposed to such a tax.

Because income-related taxes are responsive to economic conditions, there is some risk of fluctuations with economic conditions. Ho wever, experience in Birmingham and Jefferson County suggest that the tax is rela tively stable in its growth from year to year. This should be true in Montgomery as well, since the state and federal government payrolls are affected relatively little by annual economic fluctuations. Fairness issues can arise from the definitions of income, particularly in deciding how to trea t non-salary income. Fa irness issues also can arise if the tax rate is too hi gh, since that would mean that non -residents pay to the city more than is reasonable in terms of the services received.

In terms of tax balance and pa rticularly of requiring all who benefit from city services to share in their financing, it is appropriate for the City of Montgomery to consider adopting an occupational tax, assuming its legality. The common rate of 1% seems to be a reasonable starting point for such consid eration. Since Montgomery ha s no occupational tax, we cannot be certain how much this type of tax would yi eld. The yields seen by Birmingham and Auburn probably provide an upper and lower limit for a rough estimate. This suggests that a 1% occupational tax in Montgomery might raise between $30,000,000 and $60,000,000 per year, which would amount to $150 to $300 per capita. An occupational tax of 0.5% would raise half this amount, and so on.