Plans to build a new $250 million arena for the NBA’s Memphis Grizzlies call for a new 2% tax on most rental cars in Shelby County. However, a legal battle is now brewing over whether the city and county need voter approval before allocating public funds to the arena project.

Chancellor Walter Evans on July 11 ruled that Memphis and Shelby County couldn’t spend public funds, or commit government credit to support the arena’s construction, without approval of 75% of the voters in an election. Without the voter mandate, use of public funds on the arena project would violate the state Constitution because the project primarily serves a private, rather than public, purpose, Evans ruled.

The city and county, through the Memphis and Shelby County Sports Authority, plan to finance the arena project by issuing up to $230 million worth of bonds. The car rental tax, as well as other proposed sources, would eventually retire the bond debt.

Attorneys representing the city and county have filed a notice of appeal with the Tennessee Court of Appeals in Jackson. They argue that the arena would serve a legitimate public purpose, making a referendum unnecessary.

In addition to the car rental tax, other proposed funding sources include hotel and motel taxes, payments by the Memphis Light, Gas & Water Division in lieu of taxes, and a $1.15 surcharge on all tickets sold for arena events. According to the proposed plan, these sources would help retire the bond debt. If they failed to cover the entire debt, the balance would be paid for by any available public funds, other than property taxes.

The Grizzlies this summer relocated from Vancouver to Memphis. Until a new arena is constructed, the team plans to share the Pyramid arena with the University of Memphis.