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Tax Cut Proposals Aplenty

Depending on who you’re talking to, the talk of tax cuts at the Capitol amounts to election year politics or just good policy as the economy recovers. Here’s the lay of the land on who wants to cut what, and how that could impact the bottom line for Tennesseans.

Expect a tax cut, Tennessee’s high-ranking lawmakers are telling the public. In fact, expect as many as four.

Capitol Hill leaders are all but promising that Tennesseans should expect to pay less taxes on everything from their groceries to inherited multimillion-dollar estates.

“The important thing is we are sticking to the basic philosophy of our party, which is when additional revenue comes into the state, we look for ways to return it to the taxpayers instead of spending it,” said House Speaker Harwell, R-Nashville.

In past years under Gov. Phil Bredesen, a Democrat, lawmakers had considered raising taxes, such as by removing the local sales tax cap on high-priced items like boats and furs. With the GOP taking control of both chambers and the governor’s office last year, the Legislature reversed course and cut taxes by giving seniors a tax break on income from investments.

“It’s absolutely the right thing to do,” said Ben Cunningham, spokesman for Tennessee Tax Revolt, a fiscally conservative public advocacy group, and a persistent critic of heavy taxpayer burdens.

“During the good times, which is what it looks like we’re entering into now, we’re reducing taxes and expanding our economy and expanding our tax base in the future. And that’s the way to go,” he said.

In recovering from the recession that began in 2008, state revenues are now up 4.8 percent compared to a year ago, giving state officials the flexibility to decide how — or if — they’ll spend that unexpected taxpayer money. But Dick Williams of the left-leaning Tennesseans for Fair Taxation says the state should avoid rushing to reduce taxes without finding a way to offset the revenue, calling this year’s tax reform “low-hanging fruit for winning elections.”

“The whole concept of just lower taxes as low as you can ignores the fact we all rely on … roads and schools and services government provides,” said Williams, TFT chairman and an advocate for reducing the food tax in exchange for a broad-based income tax. “We just think it’s bad policy and shouldn’t be used as just a popular re-election or election tool.”

The proposed cuts enjoy varying levels of support from the two political camps and would touch all sorts of Tennesseans. Plans range from wiping away the tax on gifts like hand-me-down family cars or multimillion-dollar inheritances, reducing costs at the grocery store and giving seniors a break on taxes from earnings on stocks and bonds.

Tennessee Democrats say they’re generally in favor of cutting taxes, too, but would rather spread any tax breaks out to a larger audience by reducing the sales tax on food — even if the savings would appear small.

“As far as having an effect on people, it doesn’t have near the effect that a reduction in the sales tax on food would have, for instance,” said leading House Democrat Craig Fitzhugh, of Ripley.

Here are the four major tax cuts lawmakers are considering this year and a breakdown of how much taxpayers are currently dishing out to pay them:

“Inheritance Tax” SB3762/HB3760

This tax kicks in only when someone inherits wealth or a property worth more than $1 million. Any dollar over the $1 million threshold is taxed at progressive rates from 5.5 percent to 9.5 percent. Gov. Bill Haslam wants to gradually raise the exemption to $1.25 million beginning next year.

For example, coming into a property worth $1.04 million costs $2,200 in taxes. However, being left a property worth $5 million would cost $368,400 to inherit. Under Haslam’s plan, the $1.04 million property could be passed down tax-free next year, and the $5 million property would cost $344,650 in taxes.

Haslam and Republican lawmakers want to phase out this so-called “death tax” over the next four years, saying it hampers farm and business owners and forces some to relocate so their heirs can avoid paying the tax when they die. Democrats agree with deleting the tax in principle but say they’d rather see the state take a bigger bite out of the tax on food.

Inheritance Tax Stats:

  • In fiscal year 2011, people paid $97,875,967 in inheritance taxes.
  • In 2010, people paid: $75,887,698 in inheritance taxes.
  • That’s a 28.9% increase in the last year.
  • Reducing the tax next year will mean $14.1 million less for state government.

“Grocery Tax” SB3763/HB3761

While most other products in Tennessee carry a 7 percent state tax, non-restaurant food is taxed at 5.5 percent. The tax doesn’t apply to all groceries, like diapers or garbage bags, but only food products like meat, vegetables and bread.

Haslam wants to reduce the tax to 5.3 percent in hopes to drop it to 5 percent in three years. However, there is so far no legislation that would require the state to follow the governor’s timeline.

A family of four buying $884 a month in groceries would save $21.22 in the first year under Haslam’s proposal. Dropping the tax to 5 percent would mean that family would save $53.04 annually, and eliminating it completely would translate to $583.44 in savings a year.

Both parties are on board with this tax cut, although Democrats and some Republicans want to take a larger slice out of the tax. Some want to drop it to 5 percent next year and others want to get rid of it all together.

Food Tax Stats:

  • In fiscal year 2011, people paid $489,939,858 in taxes on non-restaurant food.
  • In 2010, people paid $476,875,314 in taxes on non-restaurant food.
  • That’s a 2.7 percent increase in the last year.
  • Reducing the tax next year to 5.3 percent would mean $17.1 million less for state government to spend.

“Gift Tax,” SB2777/HB2840

This is the newest tax cut on the block this session. This bill would repeal the state’s current 5.5 percent to 16 percent tax on gifts to individuals, like cars, boats and real estate.

The tax rate and an exemption depend on the value of the gift and who it’s given to.

For example, a father can give his daughter his old Volkswagon, and she won’t have to pay the gift tax on it unless it’s worth more than $13,000. If it is worth, say $20,000, she’d have to pay $385 in taxes. If the father gave a car to his friend’s unrelated goddaughter and it’s worth more than $3,000, she’d get stuck paying the tax. That same $20,000 car would cost her $1,105 in taxes.

Harwell added this repeal to the list of priority tax cuts earlier this month, saying it would round out the types of taxes the state should no longer impose. The governor said lawmakers have approached him about doing away with this tax, and he’s working to see whether the state can afford it.

“Gift Tax” Stats:

  • In fiscal year 2011, people paid $15,472,738 in gift taxes.
  • In 2010, people paid $11,448,443 in gift taxes.
  • That’s a 35.2 percent increase in the last year.
  • Reducing the tax next year would mean $14.9 million less for state government.

“Hall Tax,” SB2535/B3423 and SB2536/HB2972

Named after its creator Sen. Frank Hall, who pushed the bill in the late 1920s, this tax focuses on income from interest on bonds and notes and dividends from stock. That interest is taxed at 6 percent, but lower income people over 65 are exempt.

For 2011 income and the tax filing coming up next month, individuals over 65 with total income less than $16,200 and couples making less than $27,000 last year are exempt.

For 2012, the senior citizen exemptions are higher, at $26,200 for individuals or $37,000 for couples.

Lt. Gov. Ron Ramsey was behind the expanded exemption and says he wants to go further this year, although Harwell and Haslam aren’t so sure. The governor said he’s still trying to figure out what the state can afford to do.

Ramsey wants to either up the exemption by $1,000 for both single filers and couples or require that the exemption keep pace with the rate of inflation.

“Hall Tax” Stats:

  • In fiscal year 2011, people paid $189,518,032 in Hall taxes.
  • In 2010, people paid 172,459,343 in Hall taxes.
  • That’s a 9.9 percent increase in the last year.
  • Increasing the exemption by $1,000 under SB2536 would mean $88 million less in state government.
  • Increasing the exemption to keep up with inflation under SB2536 would mean $1 million less in state government.

6 replies on “Tax Cut Proposals Aplenty”

Great reporting as usual. I wonder if you have been able to discuss the budget cuts, specifically the millionaires estate tax cuts with various agencies in Tennessee that experienced huge budget cuts throughout the recession. For instance, millionaires may be getting a tax break, but tuition won’t be going down due to Tennessee’s sudden influx of revenue. Just wondering. Thank you.

The tax on food will not have a positive impact until it is zero. A 25 cent reduction on $100 purchase is an insult to the real need of so many people. Perhaps Tennessee should rethink the “education lottery”.

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