A 34% Property Tax Increase

On today’s show we’re talking about a morning after shock. No we’re not talking about an earthquake. This is the morning after the City of Nashville voted in a 34% property tax increase.

You’re probably thinking. I’m glad I don’t live in Nashville. Folks, this event should be a wakeup call for cities all over the world.

There are a couple of vitally important questions we need to answer on today’s show.

1) Are the issues that triggered such a massive tax increase unique to Nashville or do they exist elsewhere?

2) What will be the impact to Nashville, the local economy, the price of real estate, and the growth that the city has been experiencing over the past decade?

So why did Nashville face such a massive tax increase?

The Council voted 32-8 to approve an alternative budget proposed by Councilmember Bob Mendes after a night of several failed budget proposals. The Mayor had proposed a budget that called for a 32% tax increase. That motion was defeated.

The Council weighed four different budget proposals, each of which called for a significant tax increase.

The full 9.5 hour meeting can be seen on youtube https://youtu.be/Mm4a_BIfr4oand the link is in the show notes.

At the root of the tax increase was a threatening letter from the State of Tennessee’s financial comptroller.  The letter said in plain terms that if the city didn’t put enough money in their rainy day funds, the state could come in and take over the city’s finances. The state called the failure to act would be considered a surrender of the responsibility to govern which would trigger the state taking over the management of the city.

Clearly this is an issue that has been brewing for several months.

The new budget faced calls for defunding the Police and redirecting funds to community outreach. In the end, the full police budget was approved and an additional $2.5M

Council, in a surprise move, approved a plan early Wednesday morning to reroute $8.2 million from the school district's savings to a contingency fund in order to pay for teacher raises.

The budget shortfall was caused by a tornado in March, and the Covid-19 outbreak and over a 16 month period is estimated at a $470 million shortfall.

The problem with this tax increase of course is that the city can’t truly count on receiving all that revenue. At a certain point, families on fixed incomes won’t have the extra cash to fork out. Remember, property taxes are indexed to property value. Over the past decade, property values have increased dramatically in Nashville, as they have in cities all over North America. As property values increase, so too does the amount of tax collected.

Real estate investors who own rental property sign loan covenants that require them to maintain a minimum debt coverage ratio. The property tax increase will cause tens of thousands of property owners into a technical default situation with their lenders whereby they are no longer in compliance with the terms of their loans.

Then there will be those who truly can’t afford the increase. They will eventually lose the property to foreclosure, or at the tax sale for non payment of taxes. The new rate, $4.221 per $100 of assessed value.

We have also seen cases where properties that face high property taxes have in fact fallen in value. Some high tax locations like Chicago have certainly experienced this phenomenon. The city can try increasing taxes, but there is only so much money available in the general population.