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TFT: TN a ‘Regressive Tax State’

Press release from Tennesseans for Fair Taxation; January 30, 2013:

Nashville, Tennessee – Like most state tax systems, Tennessee takes a much larger share from middle- and low-income families than from wealthy families, according to the fourth edition of Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, released today by the Washington-based Institute on Taxation and Economic Policy (ITEP) and Tennesseans for Fair Taxation (TFT). Combining all of the state and local income, property, sales and excise taxes Tennessee residents pay, the average overall effective tax rates by income group are 11.2 percent for the bottom 20 percent, 8.8 percent for the middle 20 percent and 2.8 percent for the top one percent. Nationally, those figures are 11.1 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.6 percent for the top one percent. The full report is online at www.whopays.org.

Tennessee is sixth among the ten states (the “Terrible Ten”) whose tax systems are tilted most heavily towards high earners (from most to least regressive): Washington, Florida, South Dakota, Illinois, Texas, Tennessee, Arizona, Pennsylvania, Indiana, Alabama. In these states, middle-income families pay up to three times as high a share of their income as the wealthiest families; low-income families pay up to six times as much. Low-income Tennessee families pay taxes at an effective rate that is four times the rate for the top 1 percent.

“While the portion of Tennessee state and local revenue derived from sales taxes has decreased from 39.5 percent to 36.7 percent, the property tax share has risen from 15.6 percent to 17.8 percent, income taxes (personal and business) have dropped from 4.3 percent to 3.8 percent and other taxes have gone from 8.0 percent to 4.4 percent. The overall distributive effect is that state and local taxes have decreased about 4 percent for low-income families and about 10 percent for the wealthiest 1 percent of families.” observed Bill Howell, Executive Director of TFT. “It is also noteworthy that non-tax revenues like tuition for higher education have increased from 32.8 percent to 35.4 percent of state revenue.”

“We know that governors nationwide are promising to cut or eliminate taxes, but the question is who’s going to pay for it,” said Matthew Gardner, Executive Director of ITEP and an author of the study. “There’s a good chance it’s the so-called takers who spend so much on necessities that they pay an effective tax rate of 10 or more percent, due largely to sales and property taxes. In too many states, these are the people being asked to make up the revenues lost to income tax cuts that overwhelmingly benefit the wealthiest taxpayers.” State consumption tax structures are particularly regressive, with an average 7 percent rate for the poor, a 4.6 percent rate for middle incomes and a 0.9 percent rate for the wealthiest taxpayers nationwide.

The income tax in particular is being targeted for elimination by self-described tax reformers across the country and in Tennessee and Who Pays? shows that of the ten most regressive states, four do not have any taxes on personal income, one state applies it only to interest and dividends (Tennessee’s Hall tax on dividends and interest) and the other five have a personal income tax that is flat or virtually flat across all income groups. “Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside down tax system even more so,” Gardner stated.

The proposal for a constitutional amendment to ban Tennessee from ever having a broad-based income tax is making its way through the General Assembly this year. If it receives the required two-thirds vote of both houses, it will go on the ballot in November 2014 for a vote of the citizens. If it passes, it will lock Tennessee into its dubious status among the “Terrible Ten”. This measure has been promoted by a small part of the wealthiest 1 percent in Tennessee who want to enthrone themselves and their heirs at the top of society and frustrate the ambitions of anyone who happened to be born less fortunate. This is the same group that pushed for the abolition of Tennessee’s inheritance tax last year.

The data in Who Pays? also demonstrates that states commended as “low tax” are often high tax states for low- and middle- income families. The ten states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington. Tennessee only misses this list because its overall tax rate is the third lowest in the country. When you hear people brag about their low tax state, you have to ask them, “low tax for whom?” In Tennessee, the top 1% of taxpayers pay 2.8% of their income in taxes, compared with a national average of 5.6 percent. Tennessee’s rate is half of the national average and less than one-third of the top rate of 8.8% paid by Californians.

The fourth edition of Who Pays? measures the state and local taxes paid by different income groups in 2013 (at 2010 income levels including the impact of tax changes enacted through January 2, 2013) as shares of income for every state and the District of Columbia. The report is available online at www.whopays.org.

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Income-Tax Supporters Pan Proposal to Constitutionally Ban Possibility of Enacting One

Press Release from Tennesseans for Fair Taxation, March 9, 2011:

Facing a $1 billion revenue crisis, Tennessee Senate votes to limit state’s revenue options. TFT calls for revenue with justice for all Tennesseans.

Negative reaction today to the state Senate’s passage of a proposed constitutional amendment to ban an income tax is swift and sharp. In a 28-5 vote, the Senate voted to approve SJR 18, introduced by Sen. Brian Kelsey (R- Germantown). “This vote is illogical. To propose a perpetual limit on our revenue options a week before the Governor delivers a state budget with a deficit of $1 billion is not smart,” says Tennesseans for Fair Taxation member Jim Von Bramer of Johnson City, Tenn.

The resolution, if ultimately passed, would forever require Tennesseans with the least income to pay the most in state taxes. TFT has long advocated a system of taxation that requires those with the greatest ability to pay and who benefits most from our government to pay more of the cost of government. The sales tax eats up almost 12% of low-income families’ total income. On the other hand, those earning an average of $215,000 annually pay only 4.5% of their abundant income in state taxes, according to a November 2009 report, “Who Pays?”, by the Institute on Taxation and Economic Policy.

This unequal treatment tends to trap people in poverty and deny opportunity for success. It is our excessive reliance on sales and other consumption taxes that causes the imbalance. “Tennessee needs revenue with justice for all. The resolution before you today, if carried to completion, would prevent Tennessee from ever having a just tax system,” says Brian Paddock, a Jackson County attorney and TFT board member. “It is another attack by the ‘haves’ on the ‘have-nots’ and ‘have-lesses’”.

A broad-based income tax could be structured in such a way to raise an additional $1 billion in revenue while still giving more than two-thirds of Tennesseans a tax cut through generous exemptions, eliminating the tax on groceries, and reducing the general sales tax. Instead, this resolution would limit even further the share wealthy Tennesseans’ contribute to the cost of government and would prevent Tennessee from ever having a just tax system that could truly address the revenue needs of our state.

“It is irresponsible to slam the door on a tax cut for 76% of Tennesseans. The amendment to forbid any future legislature from adopting an income tax means we will have the nation’s highest sales tax far into the future,” says Brian Paddock, a Jackson County attorney and TFT board member. “We could never get rid of the sales tax on food. The only route to more revenue would be to increase the food tax, or start taxing services. We can close some tax loopholes, but Tennesseans want a tax system that does not come with a budget shortfall crisis, year after year, in good times and bad.”

“Permanently blocking an income tax lets the wealthiest Tennesseans walk away

from paying a fair share of state and local taxes forever while the rest of

us pay much more of our income on food taxes and the basic necessities we buy from our local retailers,” adds Von Bramer. “Our state budget gap will likely only grow as the federal budget shrinks. We are headed into a dark place, and now the state Senate says we should throw away our flashlight.”

Tennessee’s short-sighted overreliance on the sales tax as its primary source of income has already led to layoffs, program cuts, and exponentially rising college tuition costs due to revenue shortfalls — and this is the foreseeable future for Tennessee if the resolution’s measures ultimately succeed. The Senate’s vote today not only would ban an income tax in Tennessee, it would ban all hopes for a better economic future in the state. “Every candidate says they are for children and education, but children and education will be the most injured by the ‘cut only’ policy that is being pushed by the current administration. We need more revenue, not budget cuts!” says Katie Findley, a University of Tennessee-Knoxville student who says her college tuition has risen exponentially each year due to state budget cuts.

The Tennessee Constitution is currently silent on the question of whether the state has the power to levy a tax based on income other than dividends and interest. SJR0018 states unequivocally that the state does not have that power. The framers of Tennessee’s Constitution chose their words carefully. Respect for the Constitution demands that any amendment to it be made with the utmost caution.

“Poll after poll shows more than half of all Tennesseans support an income tax if it is combined with ending the food tax and cutting the general sales tax while bringing in enough revenue to stay competitive with other states,” says Dr. Patrick Reagan of Cookeville, Tenn. “It makes no sense to amend the state Constitution so that a cut in food and sales taxes can never be considered. This is a distrust of future voters and legislators to do what they think is best for our state.”

The process of amending the Constitution takes a minimum of two-and-a-half years. If this resolution ultimately results in a Constitutional amendment, it would take at least another four years for voters to demand its effects be reversed – effects which could prove disastrous for a state whose long-term trend has already been toward declining revenue and chronic budget shortfalls. Now more than ever, Tennessee needs revenue with justice for all.