To the Citizens of Alcoa,
The following is intended to help understand the issues faced by the City which resulted in the decision to increase the tax rate for the 2019 tax year.
The City of Alcoa has maintained the goal of keeping the property tax rate at a bare minimum while at the same time continuing to provide the citizens with the quality services they have become accustomed to receiving. The City has been successful in accomplishing this goal over the past 15 years by setting a property tax rate well below that of either Blount County or Maryville. This has been done despite the fact that the costs related to providing those essential services are not immune to inflation and those costs have gradually increased over the years.
The City has been able to keep the tax rate low in two ways. The first is to continuously search for and implement technologies and methods to deliver those services as efficiently as possible. The second and most important has been through fostering a steady growth in business development and the resulting growth in sales and property taxes. Businesses have always subsidized the cost of providing services to residences. Just considering property tax alone, businesses pay 76% of the tax while residences pay 24%. At the same time and just considering police, fire and sanitation services, businesses only consume 15% of the cost of those services while residences consume 85%. The bottom line is that business has been and will continue to be the life blood of the City.
Over the past ten years, the City has had to overcome obstacles with that reliance on business generated tax revenue. First was the great recession which dropped sales tax revenue by approximately $1.1 million from the amount received in 2008. The second was the closing of ALCOA’s South Plant in 2010. That eventually reduced the City’s property tax revenue by $600,000. After finally recovering from the recession generated sales tax loss in 2014, the City’s sales tax revenues have had to face two additional stumbling blocks described below.
In Fiscal Year 2018 the sales tax was on track to reach its budget amount of $11.2 million. However, it was discovered mid-year that the State Department of Revenue had incorrectly included several businesses located on the Metropolitan Knoxville Airport property as being inside the corporate limits of the City of Alcoa. Although the Airport lies within the overall boundaries of the City, the property itself has not been annexed and remains within the territory of Blount County. It’s not clear exactly when or how this error occurred but the net result was that under state rules, the City reimbursed the County for 12 months of past revenue. The end result was that the actual revenue for FY 2018 was $9.7 million which was a loss of $1.5 million. Additionally, this same error resulted in the City reimbursing the County for $56,000 in mixed drink taxes as well.
Based on corrected tax rolls, sales tax for FY 2019 was estimated to be $10,535,500. However, it soon became clear as revenue reports were received that the budget for FY19 was not going to be achieved. In fact, the actual revenue received on June 30, 2019 was $10,283,408 or a shortage of $252,092. Upon further investigation made possible by detailed information provided by the State Department of Revenue, it was discovered that structural changes in the distribution of sales tax collected from out of state sellers had made (and was going to continue to make) another major negative impact on the City’s sales tax revenue. Whereas in the past, out of state sales tax was allocated based on a jurisdiction’s locally generated sales tax (often referred to as “bricks & mortar” sales tax) to the total state-wide locally generated sales tax. Alcoa has benefited from that distribution method since we generate a relatively large amount of sales tax in relation to our population. However, over the past two years that method has gradually been changing. That change results from out of state sellers reporting the actual location (usually the doorstep where the product was delivered) of the sale to the Department of Revenue. When that happens, instead of putting the sales tax in a big pot in Nashville to be distributed to Alcoa, Maryville and all the other cities and counties in the state, the Department of Revenue sends the sales tax to the city or county where the sale took place. More and more retailers are now reporting sales tax on a location basis and all will be required to do so by Department of Revenue regulation beginning in October 2019.
The issue going forward for Alcoa is that the distribution of out of state sales tax will generally trend with a jurisdiction’s population combined with the wealth of that population. In other words, cities and counties with larger populations and especially if that population is relatively wealthy are more apt to purchase goods over the internet and therefore benefit from the associated direct distribution of the sales tax. Under this new method, Alcoa has been and will continue to lose based on a population of approximately 10,000 with slightly lower per-capita incomes as compared to Maryville’s 30,000 and Blount County’s 84,000 citizens (outside municipal boundaries) with higher average incomes.
The City is already seeing evidence of this loss in sales tax revenue from detailed reports of sales tax payers provided by the Department of Revenue dating back to February 2017. Over the course of a year, the City has lost in excess of $300,000 in allocated internet sales tax yet only gained back $100,000 in location based internet sales tax.
The culmination of all these revenue issues resulted in a budget for Fiscal Year 2020 (July 1, 2019 - June 30, 2020) that was simply not going to balance. As the budget process progressed into April, the General Fund budget was out of balance by over one million dollars without any new components, equipment replacements or compensation adjustments. With no more tricks left in the bag, nothing left to postpone to a future year, the Commission was faced with having no other major source of revenue aside from property tax to draw upon. The City Commission does not take decisions like this lightly and in the end determined the necessary course of action was to increase the tax rate. Fortunately, the policy of maintaining a low rate for years provided the opportunity to increase the rate to a level that still remains within the bounds of neighboring jurisdictions. The tax rate was increased from $1.96 to $2.27 which is the rate that had been calculated as necessary to amortize the debt on the proposed addition to the Alcoa Intermediate School. The construction of the school has been delayed to provide time for additional development to occur and for that development to begin generating new revenue for the City. It is anticipated that new development will provide sufficient funding to replace revenues for City operations as well as provide funding for the needed new classrooms at the Intermediate School.
Now that the Department of Revenue is providing the City with detailed sales tax information on a monthly basis, we can see that locally generated sales tax is still growing and it is clear that the City’s historical focus on generating local business growth must continue. After experiencing relatively stagnant growth over the past few years, development has now started or will soon start on the remaining portions of Hunter’s Crossing and Hamilton Crossing. Additionally, an apartment complex combined with retail is scheduled to begin construction this spring on the former Pellissippi State campus at Middlesettlements Road and the US 129 Bypass.
Although many people question the apparent lack of activity taking place in Springbrook Farm (the former West Plant), it is not unusual for businesses to be reluctant to be the first establishment in a new development – especially with the Hunt Road interchange project under construction at the same time. Despite that, there has been a flurry of activity occurring behind the scenes in preparation for development. Last month the Planning Commission approved the site plan for a new hotel and construction should begin in the next few months. Additionally, a grocery store is in the design phase and the Springbrook Farm owners are in process of constructing interior roads to serve four commercial buildings as well as a restaurant. There are several other developers engaged in the preliminary design phase for both commercial and residential projects. Although there are no guarantees, the future does look bright.
On behalf of the City Commission and the staff of the City of Alcoa, I extend our appreciation to Alcoa citizens for your understanding and support as we move forward.
Clint Abbott, Mayor Mark L. Johnson, City Manager
Please click the links below to find information regarding the State of Tennessee’s Comptroller of the Treasury Property Tax Relief program:
General Property Tax Relief Questions & Answers:
Tax Relief Brochure 2019: