An economic study concluded that a proposed 1-cent sales tax increase in Russellville, meant to give additional funds to the city and school system, would generate less revenue than expected and negatively impact the local economy.

During the past two months, the Russellville City Council deadlocked three times over a proposed 1-cent sales tax increase, which supporters say is needed to pay city and school deficit budgets hit by the recession and statewide proration. The city has not yet approved its fiscal 2010 budget and the council did not vote on budgetary matters at its Monday meeting.

The tax increase would bring an estimated $1.2 million annually. Revenue from the proposed sales tax increase would fund the city school system (38.33 percent), with the remainder going to the city's operational fund.

Councilman David Grissom, who voted against the sales tax increase, commissioned an economic study from the Center for Public Policy and Economic Research at the University of North Alabama.

Jim Couch, former Tuscumbia City Councilman and UNA economics professor, presented the results from the study. The aim of the study was to predict the dynamic effect of the proposed 1-cent sales tax increase, Couch said, rather than estimate revenue based on previous data.

"If you raise the price, quantity and demand fall," Couch said, a seesaw measured by the "elasticity" of demand, or how consumers will adjust their spending or chose alternatives with increased prices.

With Muscle Shoals 18 miles to the north, "Cross jurisdictional shopping is pretty easy in your district," Couch said.

If consumers reacted mildly to the 1-cent sales tax, the economist predicted the Russellville economy would shrink by $5.7 million, the city would lose $277,000 in predicted tax revenue, total income of Russellville residents would fall $7.6 million and the private sector would lose 128 jobs.

If shoppers reacted more strongly and decided to shop outside of Russellville, the study predicted the city's economy would shrink nearly 10 percent, the additional sales tax revenue would miss its mark by $508,000, total income of Russellville residents would fall $16.8 million and the private sector would lose 283 jobs.

Data used to estimate the figures came from studies based on West Virginia and Milwaukee and did not come from data from Russellville.

Mayor Troy Oliver, who has spearheaded the efforts to get the 1-cent sales tax passed, said he didn't believe the results of the study.

As an example, Oliver said Red Bay raised their sales tax, which caused a temporary drop in revenue, but later the revenue increased.

Critics say the additional tax will drive business away and negatively impact residents reeling from 12.3 percent unemployment during a record-long recession. Supporters say if schools do not receive the additional revenue, the resulting cuts to the educational system would negatively impact residents in the long run, even though the additional tax may be distasteful in the short term.

Grissom also presented two budgets to the councilmen during the work session, one that would give the school system $1.2 million and a second that would give the school system 38.33 percent of the city's tax revenue.

The first budget included no layoffs of city employees, natural attrition of two police officers, street lighting to be taken out of street maintenance funds, cuts in state appropriations, travel in each department, and assumed no change in sales tax for the fiscal 2010 compared to fiscal 2009.

That assumption may be called into question after Franklin County approved its 1-cent sales tax increase.

"This was before the decision today; this thing is moving so fast," Grissom said. "I'm somewhat concerned after today."

The second budget included an appropriation of 38.33 percent of city sales tax for the school system and put a deficit on the budget of $197,278.

At its last meeting, the City Council unanimously approved appropriating 38.33 percent of the current sales tax revenue. Russellville City Superintendent Don Cox, who attended the Franklin County commission meeting, said he had concerns about the city enacting the 38.33 percent appropriation.

Just 10 hours before the City Council met, the Franklin County Commission approved a 1-cent sales tax increase Monday to become effective Jan. 1 and up for a referendum in June.

The county tax increase is expected to bring an estimated $2 million annually and would be split between the county school system (58 percent) and the city school system (42 percent). The county school system is in a $3.5 million deficit and currently has a $2.7 million loan from a $3 million credit line.

Trevor Stokes can be reached at 740-5728 or trevor.stokes@TimesDaily.com.