November 11, 2016

Nashville Business Journal

From day one, the biggest question surrounding the region’s $6 billion mass-transit expansion has been, “How will we pay for it?”

This week, we got the first real look at the potential answers.

On Wednesday, members of the business-led coalition Moving Forward detailed seven potential local funding options that they believe are viable solutions to paying for the region’s nMotion transit plan.

Moving Forward, which is funded by the Nashville Area Chamber of Commerce and the Greater Nashville Association of Realtors, based its findings off a report by the Victoria Transport Policy Institute that the Nashville chamber paid for. The Canadian research organization examined 20 funding options before narrowing the field to seven potential tax increases and fees for Middle Tennessee.

And while officials and business leaders agree that Middle Tennesseans will have some financial stake in the region’s mass-transit plan, the debate hangs on how much voters will be willing to open their pocketbooks.

The Nashville chamber has been a vocal proponent of more mass-transit options in the region. Ultimately, any funding proposal that will appear on voters’ ballots will originate from local municipalities, such as Mayor Megan Barry’s office. Barry has said she would release her own funding proposal by the end of the year.

But the chamber’s proposal provides a first glimpse at what will inevitably be a hard sell, especially since the chamber estimates half the plan’s $6 billion price tag will need to come from local sources.

The mayor’s office has not said how much funding it expects to come from local sources versus state or federal dollars, but Tennessee Department of Transportation Commissioner John Schroer has publicly said Nashville need not look to TDOT for funding.

This means convincing local voters to increase taxes or fees to pay for transit in Nashville is critical if the city wants to move forward with its plan.

Many of the most vocal critics of the city’s failed Amp bus project lamented the plan’s public outreach, saying former Mayor Karl Dean failed to adequately inform voters about how the Amp would fit into a larger transit overhaul. For this reason, the Nashville Metropolitan Transit Authority and the Middle Tennessee Regional Transit Authority, along with Barry’s office, have focused on educating the public as they promoted the nMotion plan this year.

MTA CEO Steve Bland said this type of public education would be critical moving forward because the funding plans that most often pass are those that address a clear problem while providing a deliverable solution.

“It’s not simple, but it’s doable,” he said.

The plan — if fully funded and built over the next two dozen years — would extend transit service within a half-mile of 1.55 million jobs in Middle Tennessee, which is more than triple the reach of the region’s existing system. It includes improvements to infrastructure, expanded bus routes and light rail.

City officials and business leaders alike often point to Denver, Colo., as an example of what mass transit in Nashville could look like in the coming years, especially since Denver’s first attempt at funding a transit overhaul also failed. Peter Kenney, chief of staff for the Denver area’s Metro Mayors Caucus, said the week the city’s funding package failed in its initial 1997 public vote, leaders across the seven-county district started working to build a coalition.

“It took a long time, but people came together because they saw they would benefit,” Kenney said, adding that a cohesive message throughout the region is what ultimately helped win voters’ support when officials put the region’s plan on the ballot in 2004.

As Nashville plans for what comes next for its ambitious transit expansion, here’s a look at the first set of options to pay for it and what they mean for Middle Tennesseans:

Public parking

Potential revenue: Increasing the costs of public parking brings in the least amount of revenue of the suggested options, but it is a relatively stable source of future funding. Currently, drivers pay to park in 1 to 2 percent of the area’s non-residential parking spaces, which averages $20 to $40 per capita. The chamber report suggests doubling the amount of paid non-residential parking spaces to 2 or 4 percent could generate $40 to $80 per capita.

Who’s going to pay: The costs are shared between residents and visitors.

How to implement it: Each municipality has the ability to increase its parking fees.

What others do: There are numerous cities that charge for on-street and publicly owned, off-street parking, in addition to charging for access to park-and-ride lots.

Summing it up: The rates currently charged for publicly owned parking lots are considerably lower than for privately owned lots. The disadvantage, the report claims, is that it is fairly expensive to install and operate effectively, which could drag out the time it takes to see a return on investment.

Wheel tax

Potential revenue: Currently, there are 1.3 million registered vehicles in Middle Tennessee, bringing in $63.5 million in revenue annually through registration fees. If the area’s wheel tax was to increase $50 per vehicle, that would lead to an additional $65 million increase in the 10-county Greater Nashville area.

Who’s going to pay: Those who have a registered vehicle in Middle Tennessee.

How to implement it: County commissions can approve the tax with a two-thirds vote at two meetings or a public referendum that must receive a majority vote. The state Legislature also could pass its own act to introduce a wheel tax in the region.

What others do: Wheel taxes are fairly common, with 33 states and 27 local jurisdictions earmarking vehicle registration fees for transportation improvements, according to the Build America Transportation Investment Center Institute.

Summing it up: This option often has no detrimental impact on economic development and has a marginal impact on vehicle ownership, according to the chamber report. However, a wheel tax often impacts lower-income drivers more because they tend to drive less, they pay more per miles driven.

Land value capture

Potential revenue: The potential revenue from creating a special assessment district or using tax-increment financing (TIF) is hard to gauge, according to the chamber’s report. While initial revenue would be moderate, the real value from this option would be seen in the long term as land value increases.

Who’s going to pay: This solution would increase taxes on those residential and commercial spaces that benefit most from transit. Some of that tax burden also would be spread to visitors within the TIF district.

How to implement it: Currently, counties in Tennessee have the authority to impose specialized taxes on certain areas to help pay for improvements in those areas. The Nashville chamber’s report argues this can be applied to transit improvements, but the law has yet to be used in such a manner.

What others do: TIF districts are common in commercial projects and have been used in transit-orientated developments as well. In Denver, for example, a TIF district was created in the 20 acres around the city’s Union Station rail terminal to help fund renovations on the building.

Summing it up: A balance must be struck between establishing a realistic stream of revenue from a TIF district and not creating such a cost burden that it discourages development around the transit system.

Property taxes

Potential revenue: Property taxes in the 10-county Greater Nashville region currently generate $2.3 billion in revenue annually. If the region’s voters allowed for a 1 cent property tax increase, then an additional $5.2 million in property tax revenue could be generated annually, according to the Nashville chamber’s report.

Who’s going to pay: Residents. Property taxes do not impact visitors, which is partly why they are a controversial choice.

How to implement it: Tennessee state law allows counties and cities to set their own property tax rates, so the region’s officials would not need approval from the General Assembly to increase rates. But there are some catches. There are various steps officials would have to take, such as advertising any potential tax increase in the local newspaper and holding public hearings, to implement any changes. Ultimately, this path would require the approval of local municipalities, such as Nashville’s Metro Council. The other implementation method allows for local governments within a Regional Transit Authority to hold elections specifically for raising property taxes to fund an RTA plan.

What others do: In this week’s election, the Southeast Michigan Regional Transit Authority failed to push through a referendum that was expected to raise $2.9 billion during the next 20 years to fund a bus rapid-transit system and a commuter rail line between Detroit and Ann Arbor.

Summing it up: The concern with increasing property taxes is simple: It directly impacts residents. Furthermore, property taxes already are widely levied throughout the 10-county region, so asking residents to increase their rates once more might be too much to ask. Moving Forward finance co-chairman Don Abel said the property tax debate was by far the most personal and controversial of the day as the group talked through potential funding options. The benefit of increasing property taxes also is simple: They are relatively stable and bring in a lot money quickly.

Tourist services taxes

Potential revenue: The Metro Nashville $2.50 surtax and 6 percent hotel occupancy privilege tax brought in $75.5 million in the most recent fiscal year, with $66 million going to tourism promotion and $9.5 million going to other county purposes. Increasing the tax rate to 8 percent would potentially add $25 million annually in additional revenue, according to the chamber’s report.

Who’s going to pay: These types of taxes target non-residents specifically, but they could face opposition from hotel lobbying groups who could argue the area’s current rates already are fairly high.

How to implement it: Some counties in the region, including Davidson County, are maxed out in terms of what they can charge to occupy a hotel room. For this reason, they would need to lobby the state Legislature to charge additional fees. However, for counties where tourist taxes are not at their maximum, local officials would need to secure a two-thirds majority in their legislative body or pass a public referendum to approve any tax increases.

What others do: These types of taxes are imposed throughout the country. The state of Georgia, for example, implemented a $5 per night hotel tax dedicated to state transportation projects, in addition to allowing local governments the right to impose a 3 percent excise tax or an 8 percent sales tax on hotel rooms. Las Vegas has a 12 to 13 percent hotel room tax, which brought in $223 million in 2014, according to the chamber’s report.

Summing it up: The advantage of increasing tourist services taxes is they tend not to impact residents. But the disadvantage with such taxes is that increasing tourist taxes too much could lead to a drop-off in tourism, according to chamber officials. Committee members like this option as a potential funding mechanism because they believe a profitiable balance could be struck.

Gasoline/fuel taxes

Potential revenue: The state of Tennessee currently charges 21.4 cents per gallon on gasoline and 18.4 cents per gallon on diesel fuel. Individual counties can add on their own 1 cent per gallon tax to fund public transit, but none do. If the 10-county region were to implement a 1 cent tax on gasoline, then based off the area’s gas usage, the region could see an additional $10 million in total revenue, according to the chamber report.

Who’s going to pay: Anyone buying fuel in the area will pay this tax, so it will impact both residents and visitors.

How to implement it: For local officials to exercise the county’s 1 cent tax, a local referendum would be needed. Gasoline taxes are often unpopular, so pushing through such a measure would not be easy, especially for a 1 cent tax since the economic upside might not be that great. Furthermore, since the tax is collected on a state level, local government would need to figure out a way to collect their 1 cent tax option, which presents a logistics concern.

What others do: Twelve states have local gasoline taxes for transit, including North Carolina, South Carolina and Alabama.

S umming it up: Since such taxes are often unpopular with voters, the cost of gaining enough support for a public vote can potentially outweigh the benefits, at least in the short term, according to Marc Hill, the Nashville chamber’s public policy officer. For this reason, Hill said local officials might have to turn to the General Assembly to give them the power to increase the gas tax by more than 1 cent per gallon, increasing the return on investment.

Sales tax

Potential revenue: A half-cent sales tax generated about $143 million across the 10-county Greater Nashville region in 2015, according to the Nashville chamber’s report. In addition, the local option sales tax brought in $672.5 million in the region for 2015. But the catch here is that half of any county local option sales tax must be dedicated to K-12 education.

Who’s going to pay: An increase in the region’s sales tax would impact anyone making purchases in Middle Tennessee, so residents would not have to carry this cost alone.

How to implement it: There are two ways to implement an increase in the region’s sales tax. Tennessee law allows for counties and cities to increase their local option sales tax up to 2.75 percent. To make this increase, the county commission must adopt a resolution or a city’s legislative body must adopt an ordinance. Any resolution or ordinance would then need to be approved through a public referendum. Since three of the 10 counties already have a 2.75 percent sales tax, officials might have to turn to the state Legislature to get permission to create a sales-tax expansion dedicated to transportation.

What others do: According to the chamber’s report, sales taxes are the most common dedicated local transit funding source in the country. Voters have often approved ballot measures to raise their sales tax, including more than two-thirds of Los Angeles County voters in 2008, who approved a referendum for a special half-cent sales tax dedicated to bus-rapid transit and road infrastructure. More recently, voters in Wake County, N.C., this week approved a half-cent sales tax referendum to fund the region’s $2.3 billion transit plan.

Summing it up: Chamber officials said a sales tax increase is a realistic way of establishing a reliable funding stream. In the Nashville Area Metropolitan Planning Organization’s 2014 public opinion poll in seven of the region’s counties, residents were slightly more supportive of a sales tax increase than a property tax increase, which could be useful if such a measure reaches the ballot.