City gives task force bad tax facts

CAPE'S DOLLARS AND SENSE

By Bob Miller ~ Southeast Missourian

The 12-member Cape Girardeau Citizens Finance Task Force met several times over the last few weeks. It pored over the city's financial situation, established priorities for the city's needs and came up with a tax strategy it thought would be fair, meet the city's most urgent needs and be accepted by the voters.

It turns out many of the task force's conclusions were based on bad information from the city.

Of the five tax and fee increases proposed to the city council, one is prohibited by state law and the income estimate on another could turn out to be more than $600,000 off the mark.

The task force recommended a 20-cent city cigarette tax, which it estimated would bring in about $920,000 a year. The city currently has a 3-cent tax on each pack of cigarettes that generates $140,000 a year. However, state law prohibits municipalities from increasing cigarette tax rates.

In addition, it appears city officials severely underestimated the revenue that would be generated by a city use tax. A use tax is like a sales tax on out-of-state purchases.

The task force recommended a use tax, which the city collected until a few years ago when it was ruled unconstitutional. But cities were given the authority to impose a new use tax if approved by voters. The use tax would be at the same rate -- currently 2 percent -- as the city sales tax. The task force based its recommendation on an estimate by city officials that it would produce $350,000 a year in revenue.

But the Missouri Municipal League estimates the possible earnings from a use tax could be equal to approximately 8 percent of total city sales-tax revenue, which would be roughly $1.2 million. However, Gary Markenson, MML executive director, said it would be safer to budget conservatively at about $1 million.

Unfortunate decision

City manager Michael Miller said it was unfortunate that the task force was given inaccurate information by the city.

"This just shows why it's not smart to make decisions real fast," Miller said.

Ward 2 city councilman Charlie Herbst expressed some concern about the information given to the task force.

"I think it's important that we give our finance task force or any other secondary groups as accurate information as we can," Herbst said. "If citizens ask for information, it may behoove us to wait a couple of days and do some research before we get back to them."

Mayor Jay Knudtson said he sees the situation as a positive.

"There's a big part of me saying this process is working like it's supposed to," Knudtson said. "We don't live in a perfect world, and that's why there are checks and balances in place."

Knudtson said he would've liked to have seen the task force get correct information, but he didn't blame city staff members for the mistakes. More number crunching will occur as the process moves forward and more consideration is given to the different revenue ideas, the mayor said.

"I knew the numbers had to be stale and that we'd have to go back and validate them," Knudtson said. "Once we agree on the concepts we'll charge the city manager to go back and make sure the numbers are valid, legitimate, legal and accurate."

Use tax usage

Currently, use taxes are being collected by 82 municipalities and 21 counties in Missouri. The tax applies to individual and business purchases that are conducted with out-of-state vendors. This includes catalog, Internet and direct-market sales. Individuals who spend more than $2,000 a year on such purchases are required to pay use taxes. Stan Farmer of the Missouri Department of Revenue said the tax is collected by businesses and sent to the state to be distributed to cities and counties.

"Most of the mail-order companies and those types of companies that collect the tax know the tax rate where the purchaser is," he said. "There's software that helps figure that."

He added that audits are used to enforce the tax.

Supporters of a use tax say the main purpose is to create a level playing field for local retail businesses that must collect city sales taxes on in-store purchases. Cape Girardeau finance director John Richbourg said businesses that purchase items in bulk from out-of-state vendors would wind up paying the majority of this tax.

The city collected $15.2 million in sales-tax revenue in the last fiscal year, which ended June 30.

Richbourg said the cities that generate the most use-tax revenue have a lot of industry.

Richbourg said the city's estimate that a use tax would generate $350,000 was based on what the city received from a statewide use tax from 1992 to 1996. During those years, the state collected the use tax and dispersed the money back to the cities. In 1996, that procedure was ruled unconstitutional.

Farmer, with the Department of Revenue, said the ruling came because cities were reimbursed based on the percentage of sales tax they contributed to the total sales tax taken in by the state. State law was rewritten so cities could ask voters to approve their own use tax and charge their own sales-tax rate.

The last year that Cape Girardeau received use-tax revenue from the state, it collected approximately $370,000, Richbourg said. He said the $350,000 estimate was based on the final year's collection.

"Obviously, we didn't think it would've changed that much or we would've called the state," Richbourg said.

No cigarette tax increase

City attorney Eric Cunningham said Thursday that a state statute prohibits the city from increasing its 3-cent-a-pack cigarette tax.

The idea of a cigarette tax increase has been under consideration since at least this spring when a revenue team of city employees listed it among feasible revenue sources, although it ultimately recommended a three-quarter cent sales-tax increase instead.

Cunningham was not on the revenue team, but Miller, the city manager, said the city attorney's office was represented on the revenue team.

"The fewer taxes the better," said Nancy Jernigan, co-chair on the task force. "We were just trying to come up with enough revenue to fund the package of priorities we put together. If there's some fine-tuning to do with some of the numbers, this will be the time to do it."

bmiller@semissourian.com

335-6611, extension 127