Tax Cutting Measures Queued Up in General Assembly

Even though Gov. Bill Haslam is worried Tennessee isn’t sponging up enough revenue from the state’s economy to cover existing government spending programs, tax-cut proposals have been filed by members of the General Assembly’s Republican supermajority.

Following the passage of a constitutional amendment imposing a statewide income tax ban, state Sen. Brian Kelsey, chairman of the Senate Judiciary Committee in the 108th General Assembly, filed legislation to phase out the Hall Income Tax — a six percent tax on income derived from investments and dividends over $1250 a year for individuals making more than $33,000 a year — by two percent a year over the next three years starting January 2016.

And two days after Kelsey announced his legislation, the majority leaders in both legislative chambers — Sen. Mark Norris of Collierville and Rep. Gerald McCormick of Chattanooga — filed legislation that aims to take the rate of the state’s sales tax, the state’s primary source of tax revenue, down from 7 percent to 6.75 percent.

“Reducing the sales tax rate is just a small part of a much broader discussion on important tax reform issues that I look forward to having in the upcoming months,” said McCormick in a press release.

The legislation was filed to put more ideas out on the table for a greater discussion of tax reform to “decrease taxes for all Tennesseans and help economic growth throughout the state,” McCormick said. In light of state revenues continuing to come in under projections for the past few years, the majority party leaders think the time has come for a broad and “meaningful” discussion on the topic, according to the release.

The state’s finance chief said in September that the state’s relatively slow economic recovery was cause for concern, and Haslam has asked departments to prepare budget proposals for the upcoming year that represent a seven percent reduction from current operating budgets — which he has said is a routine part of the budget process.

One idea that could come up in the broader discussion on tax reform is the discontinuation of sales tax exemptions for services like haircuts and hospital stays.  Conservative talk show host Steve Gill suggested to WKRN that legislators will make a big show of “carving a little off” the Hall and state sales taxes to obscure what could in fact amount to a tax increase.

Cuts to the Hall Tax, which brings in about $260 million a year, would affect 124,062 individuals and about another 21,000 organizations, according to the Times Free Press.  McCormick told the Times Free Press that he estimated the cut to the sales tax rate would save consumers in Tennessee about $250 million in all, and most of that money would return to the state economy.

Kelsey, a Germantown Republican, said in a press release last week that the approval by two-thirds of Tennessee voters of Amendment 3 to the Tennessee Constitution, which bans any governing body in the state from levying an income tax, means “it’s time to eliminate the Hall tax.”

However, Haslam, who won re-election by a landslide last Tuesday, has maintained over the past year that the state’s revenue picture, far from rosy, doesn’t give him much confidence that Tennessee can afford to do away with the revenue the investment income tax brings in each year.

Haslam told reporters last week that while he doesn’t like the tax, he doesn’t see a way to take that money “out of our budget without something to replace it.”

The former Knoxville mayor continued with that estimation this week, when on Monday he told reporters “any discussion” of changes in state revenue collections ought to be “part of a broader discussion” that includes state expenses. “It’s easy to talk about the revenue part, then we talk about the expense part it gets a little harder,” he said.

And even before the conversation surrounding broader tax reform started, determining the state’s budget was already being discussed as a big issue facing the legislature in their upcoming session.

Following the election last week, Sen. Mike Bell, last session’s chairman of the Senate Government Operations Committee — as well as some other legislative members — told TNReport next year’s budget talks could be a big concern given the state’s recent problems with meeting tax collection projections. “I’m hoping that revenues stay up and we don’t have to cut that much, but we’ll just have to see how it goes over the next several months,” said Bell, a Republican from Riceville.

However, Tennessee has recently seen some economic growth, according to a new state report on economic indicators jointly produced by the Secretary of State’s Office and the University of Tennessee Center for Business and Economic Research.

The report, which covers the third quarter of 2014, shows a 4 percent increase over the last quarter in businesses filing paperwork with the Tennessee Secretary of State’s Office. Additionally, there’s been a 4.1 percent year-to-date increase in Tennesseans’ personal income and a 4.7 percent increase in tax revenues over the quarter.

Haslam’s hesitation to reduce or abolish the state’s only tax on income was one factor that played into his receiving a “D” on the Cato Institute’s 2014 fiscal report card for the nation’s governors, something that Haslam has said “surprised” him.