How Business-Friendly Are Tennessee s Cities?

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1 Policy Report No March 9, 2006 How Business-Friendly Are Tennessee s Cities? A ranking of the business climate in Tennessee s 50 largest communities Each year, cities across Tennessee claim to be business-friendly. They cite a satisfying community environment that draws high-quality employees, a fair and reasonable tax structure, a skilled labor pool that delivers high return on investment in human capital and local amenities that draw customers and make it easier to do business. In order to determine which city rightly claims the title of Tennessee s Most Business- Friendly City, the Tennessee Center for Policy Research compared Tennessee s 50 largest cities based on four components crucial to business development and success: Community Allure, Minimal Local Business Tax Burden, Workforce Skill/Value, and Strategic Location/Business Amenities. No city succeeded in combining the elements better than Farragut, making the Knox County community Tennessee s Most Business-Friendly City of The thriving West Knoxville satellite features a workforce that is among the most educated in Tennessee and the third lowest tax burden of all of the cities in the state behind only Sevierville and Spring Hill. Farragut also receives high marks for its convenient access to Interstate 40 and Knoxville s McGhee-Tyson Airport. Just behind Farragut in business-friendliness were Middle Tennessee suburban communities in low tax Williamson and Wilson counties. Midsized East Tennessee cities, including Sevierville, Maryville and Johnson City, filled out much of the top ten. West Tennessee consistently scored below East and Middle Tennessee in most of the indicators of a business-friendly city. Out of the 50 communities considered in this evaluation, none of the ten West Tennessee Communities ranked higher than 23rd overall and only two scored high in the top half of the 50 largest cities. Nashville is the most business-friendly of Tennessee s four largest cities, finishing 15 th. Knoxville and Chattanooga are mired at 34 th and 38 th out of 50. Memphis, with the highest business tax rate in Tennessee and the lowest marks in community allure, rates as the least business-friendly city in Tennessee.

2 Tennessee Center for Policy Research policy report Community Allure Affordable cost of living, cultural and recreational opportunities, minimal crime rates, reasonable personal tax rates and a first-rate school system mean a high quality of life for residents. Those same advantages help attract and support businesses while supplying them with a vibrant workforce. Based on these indicators, no community was more alluring than Maryville. The county seat of Blount County received high marks for low crime and the best-scoring public school systems in the state. Following Maryville in public school rankings were Business-Friendly champion Farragut, Hendersonville and Collierville. Memphis, Goodlettsville and Nashville brought up the rear of the cities in the study based on combined ACT scores and graduation rates. What Goodlettsville lacks in public school quality, however, it nearly makes up in its stateleading cultural and recreational ranking, thanks to its theaters, museums and access to sports and entertainment venues. The state s lowest crime rates belong to Spring Hill, followed by the bedroom communities of Brentwood, Collierville, Germantown and Franklin. Upper East Tennessee fared well in the bang for the buck Cost of Living category. Elizabethton delivers the lowest cost of living with Bristol, Morristown and Kingsport also scoring in the top ten. Cities with high costs of living include Brentwood, Germantown and Jackson. Local Business Tax Burden Since Tennessee applies most business-specific taxes at the state level, the primary local tax on businesses in Tennessee is property tax. Property tax is applied to 40% of the appraised value of all commercial and industrial property statewide but the tax rate varies widely from location to location. If a business property is appraised at $1 million, the taxable value of the property would be $400,000.Thus, if a city charges a 5% local property tax, the bill for that property would be $20,000 each year. Thanks to an economy that relies heavily on revenue created by its tourism industry and not on local business taxes, Sevierville ranked highest in the Local Business Tax Burden category. Sevierville maintains the state s lowest property tax rate 2.04% of the appraised value. A piece of business property in Sevierville appraised at $1 million would cost only $8,160 per year in taxes. By comparison, the tax bill for that same property in Memphis is $29,082 as a result of Memphis % property tax the highest in the state. Cities and counties in the state may also apply a local option sales tax of up to 2.75% on goods and services to which statewide sales tax is already applied. With a local option sales tax of 2%, Tullahoma has the lowest sales tax rate among Tennessee s 50 largest cities. 2

3 March 9, 2006 Fourteen cities, including Murfreesboro, Cookeville, Smyrna and Greeneville, levy the maximum sales tax rate. No West Tennessee city placed among the ten most taxpayer-friendly cities and half of the ten communities with the highest tax burden belonged to West Tennessee s Shelby County. Aside from Sevierville, other standouts for their low taxes include Spring Hill, Farragut and the Wilson County communities of Lebanon and Mount Juliet. Workforce Skill/Value A primary challenge to business operations of all sizes is hiring skilled, educated employees at a reasonable cost to the bottom line. Germantown and Farragut ranked head and shoulders above other cities in this category for the skill and education level of their populace while offering employers good value through reasonable personal income levels. Highly educated workforces propel Oak Ridge, Spring Hill and Collierville high into the ranking despite comparatively steep wage expectations. Greeneville offers a good bargain to employers through offering a source of educated employees at a good value thanks to a lower cost of living. Shelbyville, Lawrenceburg and McMinnville rank as the Tennessee towns with the least educated workforces. Strategic Location/Business Amenities In the case of many types of businesses, the success of a company relies on the conveniences of the surrounding area. Are interstates and airports accessible? Are there conference facilities? Are there banks, restaurants, hotels and leisure activities? No city answered yes to more of those questions than Nashville. Convenient access to three interstates, an international airport and more hotel rooms than any city in the state make the Music City the best location in Tennessee to draw a crowd, house a client or simply generate foot traffic. On the strength of lodging capabilities and their nearby airports and interstates, Knoxville, Chattanooga and Memphis also achieved high grades for access and convenience. High marks for restaurants, banks and golf courses put Maryville, Jackson and each of the Tri- Cities in the top 10. Not surprisingly, isolated communities such as Lawrenceburg, Martin and Tullahoma fared poorly in providing businesses with the amenities considered in this category. 3

4 Tennessee Center for Policy Research policy report Methodology The Tennessee Center for Policy Research considered four categories to determine Tennessee s Most Business-Friendly City: Community Allure, Local Business Tax Burden, Workforce Skill/Value, and Strategic Location/Business Amenities. Community Allure (20% of total business-friendly score) Cost of living rating, the culture index score, individual tax burden and crime rate per 100,000 each accounted for 20% of the Community Allure score The observed composite ACT score and high school graduation rate of the high school in the city each made up 10% of the category score Local Business Tax Burden (40% of total business-friendly score) An area s local business property tax rate comprised 75% of the Local Business Tax Burden score The local option sales tax constituted the remaining 25% Workforce Skill/Value (20% of total business-friendly score) Each of three factors constituted one-third of the Workforce Skill/Value ranking: A city s per capita personal income (lowest to highest) The percentage of adults who are high school graduates The percentage of adults who are college graduates Strategic Location/Business Amenities (20% of total business-friendly score) Seven separate factors were equally weighted to determine the Strategic Location/Business Amenities: Culture index score Interstate accessibility (miles from interstate) Airport accessibility (miles to closest commercial airport) Number of golf courses Number of hotel rooms Number of restaurants Number of banks Two aspects of great importance to business-friendliness that were not considered in this ranking are zoning ordinances and economic incentives. Oftentimes, communities rely on business development tactics such as tax breaks or eminent domain that benefit only businesses of a certain size or type. It is important that city councils, county commissions, mayors and other local policy makers work to create a welcoming environment for all businesses. This is best accomplished through zoning decisions that respect property rights while encouraging responsible development and a fiscally responsible government with a low tax burden to all taxpayers. 4

5 March 9, 2006 Conclusion No factor has been more crucial to the strength of the American economy than the entrepreneurial spirit of its people. Local governments play an ever-increasing role in encouraging and deterring that spirit and determining the business-friendliness of an area. Fortunately for Knoxville, Chattanooga, Memphis and other cities that rank among the least business-friendly cities in Tennessee, it is possible to become more business friendly. Lowering taxes, developing a strong educational system, reducing crime and creating cultural opportunities are all important components in becoming more business friendly. Prudent policy makers with the assistance of active residents and the support of the business community can continue working to meet those objectives. Because of the efforts of policy makers, residents and the business community, Farragut has succeeded in meeting those objectives in grand fashion, earning the title of Tennessee s Most Business Friendly City for

6 Tennessee Center for Policy Research policy report Sources Community Allure Cost of Living: Culture Index Score: Note: The culture index is an online index used to indicate the level to which cultural sites, activities, and events are available and accessible in the given area (e.g. museums, art galleries, playhouses, movie theaters, dance companies, colleges, libraries, music halls and concert venues, and spectator sports). Personal Tax Burden: Crime Rate: Note: Farragut crime scores reflect Knoxville scores due to shared Police protection. School Quality: Local Business Tax Burden Property Tax Rates: Local Sales Tax: Workforce Skill/Value Per Capita Personal Income: High School Graduation Rating, Bachelor's Degree Rating: Strategic Location/Business Amenities Culture Index Score: Interstate Accessibility, Airport Accessibility, Number of Golf Courses, Number of Hotel Rooms, Number of Restaurants, Number of Banks: Note: East Ridge, Farragut, Lebanon, Red Bank and Soddy-Daisy information for golf courses, hotel rooms, restaurants and banks obtained at and Some Goodlettsville information obtained at 6

7 March 9, 2006 Appendix A: Overall Business-Friendly Rank City Personal Tax Community Allure Workforce Skill/Value Strategic Location Business Amenities Grand Division Total Farragut East 69.1 Mount Juliet Middle 67.1 Franklin Middle 66.7 Sevierville East 66.4 Brentwood Middle 64.7 Maryville East 63.2 Johnson City East 61.4 Lebanon Middle 61.4 Murfreesboro Middle 60.3 Hendersonville Middle 59.7 Athens East 59.4 Spring Hill Middle 59.2 Smyrna East 58.7 Cleveland East 58.1 Nashville Middle 58 Cookeville Middle 57.8 Gallatin Middle 57.3 Morristown East 56.6 La Vergne Middle 56 Columbia Middle 55.6 Soddy-Daisy East 55 Springfield Middle 54.9 Collierville West 54.7 Martin West 54.1 Red Bank East 53.5 Clarksville Middle 53.5 Kingsport East 53.4 Jackson West 53.4 Bristol East 53.3 Greeneville East 52.4 Bartlett West 51.9 Portland Middle 51.8 Dickson Middle 51.1 Knoxville East 50.7 Union City West 50 Oak Ridge East 49.4 Goodlettsville Middle 49.3 Chattanooga East 49.2 Germantown West 49.1 Brownsville West 47.5 Elizabethton East 46.9 Dyersburg West 46.4 Millington West 45.4 Shelbyville Middle 44.6 Tullahoma Middle 44 McMinnville Middle 44 East Ridge East 43.7 Lewisburg Middle 41.4 Lawrenceburg Middle 38.1 Memphis West 35 7

8 Tennessee Center for Policy Research policy report Appendix B: Community Allure City Cost of Living Culture Rating Personal Tax Burden School Quality Crime Rating Total Maryville Mount Juliet Hendersonville Portland Farragut La Vergne Soddy-Daisy Smyrna Collierville Franklin Lebanon Sevierville Gallatin Murfreesboro Bartlett Brentwood Bristol Red Bank Johnson City Dickson Martin Clarksville Oak Ridge Springfield Kingsport Columbia Germantown Millington Cleveland Knoxville Cookeville Spring Hill Goodlettsville Elizabethton Nashville Shelbyville Dyersburg Morristown East Ridge Lewisburg Union City Athens McMinnville Tullahoma Greeneville Chattanooga Brownsville Lawrenceburg Jackson Memphis

9 Appendix C: Local Business Tax Burden March 9, 2006 City Sales Tax Score Property Tax Score Total Sevierville Spring Hill Farragut Lebanon Mount Juliet Morristown Athens Franklin La Vergne Brentwood Union City Cookeville Smyrna Soddy-Daisy Brownsville Springfield Gallatin Columbia Portland McMinnville Johnson City Martin Cleveland Dickson Shelbyville Greeneville Red Bank Lawrenceburg Dyersburg East Ridge Murfreesboro Goodlettsville Hendersonville Nashville Lewisburg Clarksville Jackson Maryville Elizabethton Kingsport Bristol Millington Tullahoma Bartlett Collierville Chattanooga Germantown Knoxville Oak Ridge Memphis

10 Tennessee Center for Policy Research policy report Appendix D: Workforce Skill/Value City High School Graduation Rating Bachelor's Degree Rating Per Capita Income Ranking Total Germantown Farragut Oak Ridge Spring Hill Collierville Greeneville Hendersonville Murfreesboro Johnson City Mount Juliet Maryville Martin Bartlett Clarksville Tullahoma Cookeville Brentwood Red Bank Jackson Franklin Smyrna Cleveland La Vergne Kingsport Knoxville Nashville Athens Elizabethton Bristol East Ridge Brownsville Chattanooga Union City Dickson Columbia Goodlettsville Sevierville Gallatin Lewisburg Millington Memphis Morristown Lawrenceburg Dyersburg Soddy-Daisy McMinnville Lebanon Springfield Portland Shelbyville

11 Appendix E: Strategic Location/Business Amenities March 9, 2006 City Culture Rating Interstate Access Commercial Airport Access Golf Courses Hotel Rooms Restaurants Banks Total Nashville Knoxville Chattanooga Maryville Jackson Johnson City Memphis Kingsport Franklin Cleveland Murfreesboro Brentwood Goodlettsville Clarksville Bristol Cookeville Morristown Hendersonville Athens Smyrna Bartlett Sevierville Lebanon Gallatin Oak Ridge Greeneville Millington Mount Juliet Columbia Springfield Dickson Union City Farragut Elizabethton Brownsville

12 Tennessee Center for Policy Research policy report Appendix E: Strategic Location/Business Amenities (Continued) City Culture Rating Interstate Access Commercial Airport Access Golf Courses Hotel Rooms Restaurants Banks Total Shelbyville Red Bank Collierville La Vergne Germantown Soddy-Daisy Dyersburg East Ridge McMinnville Portland Lewisburg Tullahoma Martin Spring Hill Lawrenceburg

13 About the Author Drew Johnson is president of the Tennessee Center for Policy Research, a nonprofit, nonpartisan research institute committed to responsible government. March 9, 2006 About the Tennessee Center for Policy Research The Tennessee Center for Policy Research is an independent, nonprofit and nonpartisan research organization dedicated to providing concerned citizens, the media and public leaders with expert empirical research and timely free market policy solutions to public policy issues in Tennessee. The Center generates and encourages public policy remedies grounded in the capacity of private enterprise, the ingenuity of individuals and the abilities of active communities to achieve a freer, more prosperous Tennessee. Guarantee of Quality Scholarship The Tennessee Center for Policy Research is committed to delivering the highest quality and most reliable research on Tennessee policy issues. The Center guarantees that all original factual data are true and correct and that information attributed to other sources is accurately represented. The Center encourages rigorous critique of its research. If an error ever exists in the accuracy of any material fact or reference to an independent source, please bring the mistake to the Center s attention with supporting evidence. The Center will respond in writing and correct the mistake in an errata sheet accompanying all subsequent distribution of the publication, which constitutes the complete and final remedy under this guarantee. Copyright 2006 by the Tennessee Center for Policy Research, Nashville, Tennessee P.O. Box Nashville, Tennessee (615) Fax: (615) info@tennesseepolicy.org Permission to reprint in whole or in part is hereby granted, provided that the Tennessee Center for Policy Research is properly cited. 13

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