How sales tax became king in Columbia
By most indicators, Columbia is a thriving city. It ranks high on several “best small places” lists. The unemployment rate is pretty low – 3.7% in 2013. The growth rate is pretty high – up 5.9% between 2010 and 2013. And you’d think as goes the city, so goes its government.
But during budget discussions at city council earlier this month, city manager Mike Matthes noted, “every city department is about 30% understaffed from our competition, our bench mark, our comparison cities.”
During an interview, Matthes explained one big reason for the disconnect between the city’s growth and its government’s is a heavy reliance on sales tax.
More than a quarter of revenue in the city’s general fund – which pays for, among other services, the police and fire departments – comes from sales tax; more than any other source. Compare it to less than 9% of revenue coming from property taxes.
Sales tax is particularly susceptible to the economy. In a good economy people spend more. In a bad one, people spend less. Combine the recent recession with the rise of online shopping – where local sales taxes are avoided all together – and Columbia’s reliance on sales tax revenue has become a major problem.
Matthes says the city has seen a 20% reduction in per capita sales tax revenue since 2001.
According to Terry Jones, professor of political science and public policy administration at the University of Missouri - St. Louis, sales tax, "became popular as a source of municipal revenue starting about 30 years ago. Before that the property tax prevailed in most jurisdictions.”
Jones attributes the popularity of sales tax to two factors. First, it is collected in small increments – as opposed to a property tax, which is collected in a lump sum. Secondly, a portion of sales tax is paid for by non-residents. Jones estimated 20%-30% of sales tax in Columbia comes from non-residents due to the high student population.
So Missouri municipalities lobbied for approval to collect local sales taxes. In Columbia, voters approved a general revenue sales tax in 1970, followed by additional sales taxes including one for transportation in 1982, one for capital improvements in 1991, and one for parks in 2001. All told, the city of Columbia collects a 2% sales tax.The strategy worked across the country, and was particularly popular in Missouri.
A 2014 report by the Tax Foundation says Missouri’s average local sales tax rate – the combined sales taxes of city and county – is one of the highest in the country.
And in Columbia, voters will be asked to renew two of those sales tax initiatives on ballots in 2015. But Matthes says increasing sales tax alone is no longer sufficient for the city, particularly for funding the police and fire departments.
"I can't hire a police officer and then lay him off next year when the money [from sales taxes] doesn't come in," he said. "So we really do need a property tax support for that."
Adding, "property tax is the most stable kind of tax."
So in November, Columbia voters will be asked to consider a 30 cent increase in property taxes to fund public safety.
Note: An earlier version of this story incorrectly reported Columbia's sales tax rate at 2.375%. The .375% sales tax to fund 911 emergency services is collected by the county, not the city.