Float a Tax: Watch it Sink

10 August 2006

by Mike Kroll

Galesburg City Manager Gary Goddard took his own initiative to propose a brand new local tax and the tripling of an existing tax at Monday’s City Council meeting. First up was a one percent sales tax on prepared food sold for immediate consumption and alcoholic beverages that would be on top of the existing 7.5 percent sales tax. By singling out prepared food and booze Goddard avoided the sales tax moniker and instead labeled this the Prepared food and liquor tax. City staff estimated that the new tax would generate about $440,000 per year. The next agenda item was a proposal to triple the current two percent telecommunications tax on all land-line and cellular phone calls in Galesburg. Galesburg currently collects approximately $350,000 each year from local phone users and Goddard expects this to top one million dollars annually with the new six percent rate. Goddard would like both of these tax changes to go into effect January 1, 2007. Happy New Year!

A tax by any name is bound to stir up feelings and the food and beverage tax did just that. There was a line of area businessmen chomping at the bit to object to this new tax but before they could speak Mayor Gary Smith recognized John Stout. Stout, who apparently got all his information on the new tax from an errant Register-Mail article in the Sunday paper. Stout proceeded to complain that taxing only carryout food would be too complex and griped that the City Council always makes things too complicated. He suggested that if they want to impose the new tax that it apply to all prepared food and alcohol instead of just carry-out. Of course Stout was wrong on both counts. The tax already applied more broadly and it was Goddard not the City Council initiating the new tax.

Guy Vitale was the next one to object to the food and liquor tax. He owns and runs G&M Distributing and provides soft drinks, beer and liquor to many of the Galesburg establishments who would need to impose the new tax. Vitale began by saying that taxes such as this “encourage a negative community attitude” and then moved to opposing the establishment of such a new tax on “a select group of business people.” Eventually he got around to saying that “too many people in Galesburg just can’t afford more taxes” and ended by saying that such new taxes were “short run” or “stop gap measures” to addressing Galesburg’s real need for more economic development. “The problem is we don’t have enough jobs in Galesburg. The intelligent way to go about this is to work with private industry to increase the volume of sales rather than raising the tax rate.”

Vitale should know about this, he’s chairman of the Galesburg Regional Economic Development Association and GREDA is the group we fund to accomplish local economic development. Vitale and GREDA basked in one of its few successes earlier Monday evening as the City Council approved a low interest revolving loan to Westcode, Inc. who promise to create 25 new Galesburg jobs when they move their plant to the former Embraco building on South Henderson Street. Westcode builds air conditioning units for railroad locomotives and passenger cars.

Next Larry Lieber, owner of the Hungary Hobo sandwich shop on North Henderson Street complained that taxes are already too high in Galesburg. He noted that all of his business costs are rising forcing him to hike his menu prices three percent. Lieber fears that combining higher prices with higher taxes will drive away business.

The surprise nature of the proposed tax increase is what spurred Phil Dickinson, owner of the Landmark on Seminary Street to speak in opposition to the proposed tax. “It was frustrating to read about this tax in the Sunday newspaper.” If Dickinson was surprised he should have talked to some of the Aldermen. Asked before the meeting where these two taxes originated numerous city council members told me they only heard about the taxes a day or two before the agenda was posted to the city website Friday.

Dickinson admitted he doesn’t know what expenses were supposed to be covered by the new tax but he was concerned that it was being imposed on only those who sell prepared food and alcohol. “If we really need the money then maybe we should talk about an increase in the general sales tax rather than just on one group of merchants.” In the information prepared for the council Goddard simply said that this money would go into the city’s general fund “that provides the majority of city services.” In his manager’s report Goddard suggested that five percent of the revenues raised from this food and beverage tax go to the Lodging and Restaurant Association and the Tourism Council “in order for them to more fully promote their activities that should ultimately increase restaurant and beverage sales.”

During the public meeting Goddard did not mention any specific expenditures he would like to cover with this revenue but he did offer me some specifics during the meeting break. I began by asking if any of this money was intended for the Railroad Hall of Fame. “The Railroad Hall of fame was part of my thought process here. If they came back asking for more city funding this could be one source of that money. But there are many other projects I would like to see done with the money. We would like to refurbish the Lakeside Tennis building and turn all of the tennis courts into multi-use courts. That would make the building much more useful and flexible for recreation purposes. I really would like to see at least some of this tax devoted to recreation needs.” Goddard is correct when he points out that tight budgets in recent years have precluded nearly all capital improvement projects and there is no shortage of worthy projects around town.

The substantial backlash to the proposed tax will probably doom it at the next City Council meeting but only some of the objections voiced Monday were really legitimate. Contrary to popular opinion Galesburg is not an overtaxed town. If anything the City Council and administration have been guilty of undercharging for things like volume water service, license fees, and even fees for certain services. Neither the Galesburg sales tax nor property tax rates are out of line with comparable Illinois communities and both our infrastructure and quality of life are suffering for lack of funds.

Curiously, the second tax hike garnered absolutely no audience objection even though it is much more suspect and poses higher costs to taxpayers, or at least those who do not escape the telecommunications tax altogether. Goddard wants to triple the current telecommunications tax from two percent to six percent on all telephone usage in Galesburg. This tax specifically excludes cable television and cable Internet service despite the growing popularity of voice over IP telephony products such as Vonage. Furthermore, the tax only applies to cell phones sold in Galesburg. As more and more residents give up their residential land-line telephone and can obtain cell phone service virtually anywhere fewer and fewer of these callers will be subject to this new tax if they merely sign up for their phone out of town.

Goddard wants to use this additional $700,000 to help fund the BNSF Fiber Optic project (see sidebar for details). “We have no definitive costs right now but our consultant has experience doing this an we have estimates available right now that we believe are high. This project is critical to the economic future of Galesburg. Some have compared the fiber optic project to construction of the water pipeline to Oquawka nearly 50 years ago.”

Mayor Smith is also totally sold on the BNSF Fiber Optic project. “I can’t tell you how important this is going to be for the economic future of our community. We need to attract white-collar jobs and those kinds of jobs require bandwidth such as this. If we don’t have this in a few years Galesburg will be left behind.”

A number of city council members were hesitant to approve the tax at this time because there remain so many unknowns about the costs and feasibility of the BNSF Fiber Optic project. According to city staff firm figures on cost won’t be available until late October but the city council will be pushed to vote on this new tax at the August 21 meeting even without additional information. That’s because Goddard wants the new tax to go into effect January 1, 2007 and to do so he must inform the State Department of Revenue by September 20th. Goddard also emphasized that the BNSF plans to go ahead with their project in 2007 with or without the participation of the consortium. “The BNSF doesn’t want to wait on us.”

Left unsaid was that delaying a vote until more and better information is available will merely delay in implementation date of the new tax rate. The Department of Revenue permits tax rates to change each quarter. Forcing a vote now amounts to backing council members into a corner to approve a extremely costly project few understand at a time when the city faces numerous other pressing capital improvement projects.

If this tax increase is passed it will greatly impact Gallatin River Communications and its customers. GRC president Fred Miri is disturbed about both the tax itself and the BNSF Fiber Optic project that he sees as totally unnecessary.

“I’m trying to understand why Galesburg would want to tax only one class of customers affecting mainly the customers of the local phone company. I say this because it seems very discriminatory to tax GRC’s customers and not tax GRC’s competitors. Nationwide Internet phone services already exist and the local cable company is about to launch an Internet phone service of its own. It appears that neither will be included in this telecommunications tax. Since the Internet is under the jurisdiction of the FCC and states and cities don’t currently have a means to tax it Gallatin River and its customer’s will be disproportionately taxed simply because the city can.”

Miri sees this tax situation as unfair to his company and his customers. “A better effort I feel is working to get these Internet phone companies like Vonage and others to pay equivalent taxes and E-911 fees that they are now exempt from. Today Galesburg, like many other communities in Illinois, are not receiving and E-911 fees from these Internet phone companies even though the Galesburg Fire and police centers take calls from their customers in Galesburg.”

Another issue is that as more and more residential customers drop traditional land-line telephone service the burden of such taxes will fall more and more upon business customers that don’t have the same options. Ironically, this tax increase that is being sold as an economic development tool can actually be seen as anti-business. And from Miri’s viewpoint taxing his customers to enable the city to go into competition with his company is certainly not a pro-business position.