Nashville’s combined sales tax rate would be tied with Chicago's atop the nation in six years if voters approve Mayor Megan Barry’s funding proposal to pay for a $5.2 billion transit plan.

Over that same time, Nashville would move up the list of cities with the highest effective tax rates on hotel stays, moving to sixth overall and to second among the nation’s 26 largest markets, behind only Atlanta.

The Metro Council and Nashville voters are tasked with weighing the city’s first proposed high-capacity transit system — headlined by light rail and a $936 million downtown connection tunnel — versus the potential stress of additional tax burdens that would affect every consumer in the city as well as tourists and out-of-town visitors.

► More:Mayor Barry unveils sweeping $5.2 billion transit proposal for Nashville with light rail, massive tunnel

“It will not be free,” Barry acknowledged in a speech this week to city leaders and transit boosters unveiling her transit vision, which she framed as an “investment in our future.”

Sales tax proposal would move Nashville from 10th to tied for first

The mayor has proposed four tax increases for a referendum in May that is led by a 0.5 percentage point sales tax increase in July that would become a 1 percentage point jump in 2023. Other taxes targeted are the hotel/motel tax, local rental car tax and business and excise tax.

Because Tennessee is among only nine states without an income tax — a Republican-led constitutional amendment passed in 2014 bans such a tax in the Volunteer State — the state and local governments depend heavily on sales tax, which is considered a regressive tax that affects the poor disproportionately.

Tennessee’s sales tax is 7 percent on every dollar spent and Metro charges an additional 2.25 percent in local sales tax for a 9.25 percent total. If the transit initiative passes, the sales tax will increase to 9.75 percent next year and to 10.25 percent in 2023.

► More:Downtown Nashville underground tunnel to be part of Mayor Megan Barry's transit plan

The 10.25 percent rate would move Nashville, which is currently tied for the 10th highest combined sales tax, past cities such as Oakland, Calif., Seattle and Birmingham, Ala. The rate would tie Chicago.

Nashville's peak local sales tax rate of 3.25 percent would still be lower than Chicago, 4 percent, and other cities because of Tennessee's high state sales tax.

Poverty advocates criticize sales tax hike, applaud reduced fare plan

Nashville’s local portion had been capped at 2.75 percent, but following approval of the Tennessee IMPROVE Act in the spring, Nashville is among 12 local governments with the flexibility to add a 2.25 percent surcharge devoted specifically to transit projects.

Although multiple taxes are identified in the IMPROVE Act as options, sales tax is the only one with the capacity necessary to fund a plan of the scale proposed by Barry, according to projections from William Fox, professor of business and economics at the University of Tennessee.

The mayor’s plan includes 26 miles of light rail on four major corridors, a 1.8-mile tunnel below downtown that would connect transit lines, 25 miles of bus rapid transit and immediate service improvements to the city’s buses.

Anti-poverty advocates were quick to criticize the mayor’s funding strategy last month after The Tennessean first reported that a sales tax increase would be part of her plan.

► More:Activists warn of Mayor Barry's transit push becoming 'gentrification train,' demand benefits

During Tuesday’s transit announcement, Barry said she shares concerns about the “potential burden a one-cent sales tax surcharge can have on lower-income residents.”

But Barry also cited research from the Nashville Area Chamber of Commerce that found 47 percent of sales tax revenue comes from tourists. And she sought to assuage fears about sales tax by pledging that, as part of her transit proposal, Metro would offer free or reduced fare for Nashvillians experiencing poverty, for those living with disabilities, for senior citizens and for youth.

If a Nashville household spent $10,000 a year on goods taxable at the new rate, they would pay $100 more a year.

“Overall, this represents a financially responsible approach to building a bold, comprehensive transit network to meet Nashville’s current and future needs,” Barry said.

Advocates from the group Nashville Organized for Action and Hope, or NOAH, met with members of Barry’s administration before Tuesday’s announcement to express concerns about raising the sales tax.

Sekou Franklin, a Nashville activist who has criticized the sales tax proposal, applauded the fare reduction program but said its effectiveness will be determined by how it is implemented.

“I sympathize for the need to pay for transit, but we already have if not the most regressive, one of the most regressive tax structures in the country," Franklin said. "So, I have major concerns about the sales tax increase.”

► More:High-powered campaign now underway for Mayor Megan Barry's transit referendum

But Walter Searcy, a Nashville attorney and organizer with the Transit for Nashville Coalition, said the burden of sales is "borne broadly," noting it would affect visitors to Nashville as well. Using property taxes, in contrast, would be shouldered entirely by residents, he said.

He said sales tax is one of the few viable options to pay for the construction and maintenance of such a far-reaching transit plan.

"As distasteful as it may be, nevertheless that's the reality," he said, adding that the transit system would create jobs and that reduced fares would help "blunt the impact" for Nashvillians living in poverty. "If you ask me, it's a win-win-win proposition for the city, and of course it is not a proposition without its costs."

Effective hotel tax rate would trail only Atlanta among largest markets

Nashville’s hotel/motel tax — which is paid by anyone who stays at a hotel, a short-term rental and other lodging — is 6 percent.

Barry has proposed a 0.25 percentage point increase next year, which would be adjusted to a 0.375 percentage point increase in 2023.

When combined with Nashville’s current sales tax that is applied to lodging, as well as a $2.50 per-night fee applied to hotel stays, Nashville currently has a 16.91 percent tax rate on hotels, fifth in the country, according to a 2017 report from HVS Lodging.

► More:Mayor Megan Barry poll floats four separate taxes for Nashville mass transit

Combined with the initial 0.5 percentage point sales tax increase next year under Barry’s plan, the effective tax rate on hotels would move to 17.785 percent next year. It would move to 18.285 percent in 2023 when the sales tax increase jumps by 1 percentage point.

That would catapult Nashville above Anaheim, Calif., and Houston, which both have effective hotel tax rates of 17 percent, and St. Louis, which is at 17.93 percent. In addition to Atlanta, Nashville would trail only Kansas City and three other Georgia cities, Augusta, Macon and Columbus.

Tourism chief endorses hotel/motel tax hike

Butch Spyridon, president and CEO of the Nashville Visitors and Convention Corp., said his organization is comfortable with Barry’s plan — both the use of funds to build transit and the increase. He said Barry’s administration listened to concerns of the city’s hospitality and tourism industries.

“We’re pretty comfortable and confident that any negative impact would be minimal,” Spyridon said, adding that the “point of diminishing return” would be if the tax rate were 18.5 percent or higher. “That’s when customers start to reject. We’ve seen it around the country.”

Spyridon said tourism officials will have an idea of the potential impact of the tax increase after the initial hotel tax rate jump to 17.785 percent in 2018.

“Davidson County visitor spending is so strong that we have to be very mindful that we don’t turn that spigot off,” he said.

► More:How Nashville's $5.2 billion proposed transit system would be funded

Colin Reed, chairman and CEO of Ryman Hospitality, which owns the Gaylord Opryland Resort & Convention Center, had no comment about the funding proposal, company spokeswoman Shannon Sullivan said.

The Greater Nashville Hospitality Association’s board of directors voted unanimously on Wednesday to support the transit plan, including the funding model.

“As an industry we know we need to be part of the solution to get workers and visitors around the city,” said Greg Adkins, president of the Tennessee Hospitality and Tourism Association, adding that some hospitality workers probably would be able to use the reduced transit fares.

He said the key thing with the higher hotel tax rate is avoiding becoming the highest in the nation, which he suggested could affect rates of large groups staying in Nashville for conventions.

“We don’t want to be No. 1,” he said of the higher tax rate on hotel stays. “That’s the thing you want to avoid.”

According to the Tax Foundation, below are the cities with the highest combined state and local sales tax rates in the nation.

City State Local Total

1. Chicago 6.25% 4.00% 10.25%

1. Nashville 7.00% 3.25% 10.25%

3. Baton Rouge, La. 5.00% 5.00% 10.00%

3. Birmingham, Ala. 4.00% 6.00% 10.00%

3. Montgomery, Ala. 4.00% 6.00% 10.00%

3. New Orleans 5.00% 5.00% 10.00%

7. Seattle 6.50% 3.10% 9.60%

7. Tacoma, Wash. 6.50% 3.10% 9.60%

9. Fremont, Calif. 7.50% 2.00% 9.50%

9. Oakland, Calif. 7.50% 2.00% 9.50%

10. Memphis 7.00% 2.25% 9.25%

*10. Nashville 7.00% 2.25% 9.25%

*Nashville's current sales tax rate

In bold is Nashville's sales tax rate in 2023 under Mayor Megan Barry's transit referendum plan.

Nate Rau and Jamie McGee contributed to this report.

Reach Joey Garrison at jgarrison@tennessean.com or 615-259-8236 and on Twitter @joeygarrison.