City commission decides against reducing tax rates

Jul. 13—At a city work session last month, Mayor Tom Watson asked city staff members to study the economic impact of reducing the city's occupation and insurance premium tax rates.

After hearing a report Tuesday afternoon of the estimated hit city finances would take from the reduction, commissioners said reducing tax rates now is not feasible.

City Manager Nate Pagan presented the analysis, which looked at the potential impact of reducing occupational tax and insurance premium tax rates to what they were in 2017. That year, commissioners raised occupational net profit and insurance premium tax rates as a way to reduce the city's projected multimillion-dollar deficit.

The impact on individuals would be negligible, Pagan said. Reducing the occupational tax rate from the current 1.78% rate to the 2017 rate of 1.39% would mean a person making $50,000 annually would save $7.50 every two weeks, Pagan said.

Lowering the insurance premium tax rate from 10% to 8%, the rate it was in 2017, would save home owners with a $125,600 house $14 annually, Pagan said.

Expenses are anticipated to start exceeding revenue beginning in fiscal year 2023-24, which will begin reducing the city's $29.637 million general fund balance.

Earlier this year, the estimate was the general fund would be reduced to $27.011 million by 2027-28. But Pagan said that estimate was made before inflation began cutting into city operations.

Since then, fuel prices have increased 74%, paving material costs have risen 57%, sign materials have seen a 44% increase and cleaning supplies have risen 35%, Pagan said.

In addition, the city is planning to construct a transient boat dock on the riverfront and is contemplating building an indoor sports complex. The annual operating, maintenance and debt service on the projects would be more than $1 million annually. Also, the city is anticipating $2.850 million in wage adjustments for city workers, as a way to retain employees, Pagan said.

"We are having a lot of turnover and are losing (employees), not so much to public agencies, but private" businesses, Pagan said.

Those factors would reduce the city's general fund balance from $29.6 million to $5.687 million by 2027-28, according to documents Pagan presented at Tuesday's meeting. If the tax rates were reduced to 2017 levels, projections show the city would deplete its general fund by fiscal year 2024-25 and would have $16.443 million more in expenses than revenue by fiscal year 2027-28.

The deficit "gets rather large rather quickly" if the tax rates revert to 2017 levels, Pagan said.

City staff looked at a compromise plan, where the occupation tax rate would be reduced to 1.5% while the insurance premium rate would stay at 10%. Under that scenario, the city would deplete the general fund by 2025-26, and expenses would outpace revenue by $11.480 million by fiscal year 2027-28.

The city currently has an "A1" bond rating from Moody's, meaning the financial services company considers the city to be financially sound. But if the city were to begin running deficits, that rating "can change pretty quickly in two to three years," Pagan said.

Watson, who said previously he wanted to give taxpayers relief during a period of high inflation, said keeping tax rates at their current rates is "a no-brainer."

"I really meant to do it," Watson said of reducing the rates. "But it makes no sense to do it."

James Mayse, 270-691-7303, jmayse@messenger-inquirer.com, Twitter: @JamesMayse