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Business and Economy NewsTracker Tax and Budget

RYO Shop Operators Claim Victimization by Gov’t, Big Tobacco

Tennessee tobacco farmers will see taxes on their products rise because of legislation passed this year by the General Assembly, mirrored by a provision in the federal highway bill passed in July.

Although the highway bill has been touted by Washington politicians as supporting or creating around a million jobs, the provision taxing roll-your-own tobacco shops as manufacturers could put an end to an entire industry.

“It’s definitely a major body blow, a knockout punch if you will,” said Mark Griffey, one of the proprietors of Smokes-4-Less in the Knoxville area. Griffey says he shut down two of his three stores and laid off nine of his 10 employees after the federal bill was signed. “So, for all intents and purposes, if we don’t get some kind of injunction or antitrust suit, or something, we’re dead.”

The federal bill raises taxes on pipe tobacco to the same rates as cigarette tobacco and requires that roll-your-own shops be licensed as manufacturers in order to run the machines, which cost over $30,000 apiece — an investment businesses say now looks to be a money loser.

The state legislation sought to “level the playing field” by requiring the roll-your-own shops to register with the state to ensure that they were using the proper tobacco, paying the proper taxes on the tobacco, and paying into the Master Settlement fund, said Senate bill sponsor Jack Johnson, R-Franklin. The fund was set up after a 1998 settlement between the top four cigarette companies and the states, which required payments from the companies over a 25-year period.

“As I understand it, the federal law is pretty much going to put them out of business,” said Johnson, who, in the interest of full disclosure, admitted during the legislative session that his wife operates a convenience store. “That was not our intention with what we passed at the state level, but we did feel like it was necessary to level the playing field a little bit.”

Voting against the measure was Rep. Frank Niceley, R-Knoxville, who says it will work a hardship on farmers.

“It was just a tax on Tennessee farmers, and I‘ve never voted to tax Tennessee farmers,” said Niceley. “And I’m probably not going to be starting.”

Business owners like Griffey say the bills are a thinly-veiled effort by government and big business to butt roll-your-own operations out of the market. Although the state measure would have been crippling enough, it at least allowed them time to adapt, Griffey said. But the enaction of the federal bill was instantaneous.

“They started talking about it at the end of June, and then July 5th or 6th, Obama signed the thing, and it’s instant,” said Griffey.

Nationwide, there are about 1,000 stores with roll-your-own machines from RYO Machines, a leading manufacturer, RYO told the Huffington Post in July.

Griffey said he feels that much of the pressure on legislators to level the playing field seems to have come from lobbyists for larger tobacco companies and convenience stores, industries which were negatively affected by the roll-your-own shops’ ability to sell tobacco at a lower tax rate. This sentiment is one that Niceley shares.

“They call these machines manufacturers, they can make 200 in about 10-12 minutes, with the customer doing it themselves,” Griffey said. “The way they make them, they make 20,000 in a minute. It’s just the big guy snuffing out the little guy.”

Tennessee Republican Congresswoman Diane Black also sponsored a measure to raise the tax rates on roll-your-own shops, though it was not her measure that ultimately passed.

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Featured NewsTracker Tax and Budget

Lawmakers React to Haslam Cabinet Raises

Democrats say they’re surprised that Gov. Bill Haslam would opt to pay his top agency bosses 11 percent more than his predecessor did.

“I think at a time of high unemployment, this really sends the wrong signal to increase the pay of the state’s top administrators and these commissioners,” said state Sen. Lowe Finney, a high ranking Democrat from Jackson.

According to a report by The Associated Press, Haslam’s state commissioners’ minimum salary is $15,000 higher than that those from Gov. Phil Bredesen’s administration.

Haslam raised the minimum salary to $150,000 from $135,000 for agency heads, according to The AP. The maximum is now $200,000, up from a previous $180,000 high.

Republican leaders across the board say they support Haslam’s decision to pay high-level commissioners more money if it means better returns in the long run.

“We’re honored and pleased to have these commissioners and they need to be paid accordingly,” said House Speaker Beth Harwell who said the high quality leaders will ultimately find ways to make government more efficient. She added that there’s “no good time” to give a raise, but said she backs the governor’s move.

“I think in the state of Tennessee we need to have fewer employees who make more money each,” said Rep. Gerald McCormick, the House Republican Leader. “You’ve got to be competitive in pay in order to attract good people.”

In the next few months, lawmakers will be considering cuts to the state budget after about $2 billion in federal stimulus dollars run out. Haslam has offered to reduce the number of state employees from 5,100 to 4,800 but give remaining employees a 1.6 percent raise after a four-year pay freeze.

The raises are part of a larger strategy to reform state government, said a Haslam spokesman.

“State pay will never rival the pay in private sector, but if we’re going to attract great people we’re going to have to at least make it comparable,” spokesman David Smith told TNReport in an emailed statement.

“He has hired a great team to make state government more efficient and effective, and these commissioners should end up saving the state more money than the increase in their salary. They’ll do it by managing smartly, which is typically done by providing better service with fewer people,” he continued.

The following chart is courtesy of Gov. Bill Haslam’s communications office.

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State Workers Pushing for Pay Hikes

Tennessee state employees are demanding a 7 percent raise in next year’s budget. But with only three weeks before the November election and another tight fiscal year ahead, neither candidate for governor says that kind of across-the-board salary bump is realistic.

At a time when most hopefuls in competitive political races are trying to sell voters on their ability to restrain government spending, the state employees’ association says it will push for a pay increase anyway — and promises to hold lawmakers who balk at their demands accountable in 2012.

“I personally will be shocked if the Legislature does not come up with a pay raise for state employees,” said Robert O’Connell, executive director of the Tennessee State Employees Association. “It’s not a wild, radical idea. It’s just time.”

State workers have gone three years without a raise while the cost of living has increased by 6.9 percent, according to O’Connell.

Every percentage point increase in pay costs the state about $50 million, according to the Department of Finance and Administration. A pay-hike of the sort the government workers’ union is demanding would run about $350 million.

But just last week, Gov. Phil Bredesen’s administration collected proposed cuts of up to 3 percent from each department in order to slash between $45 million and $160 million from the budget should the economy take a nosedive.

“We’re not sitting here with rose-colored glasses on. We see their (revenue) predictions,” O’Connell said. “But that doesn’t mean we’re not presently on the road to recovery. We are.”

September revenues came in 6.14 percent, or $977 million, higher than expected, according to the Department of Finance and Administration. The increased tax collections follow two years of consistently lackluster revenues that repeatedly failed to meet expectations.

But with Bredesen leaving office in January, it’ll be up to the next governor and a new band of legislators to pass a budget, and decide whether it makes sense to extend a significant raise to the state’s 43,000 employees.

Republican Bill Haslam, who polling suggests is the clear front-runner in the race for Tennessee governor, is sounding hesitant on the raise issue — at least at the level the union is talking.

“To be frank with you, I don’t see that being realistic in the next year or two,” said the two-term Knoxville mayor.

Haslam believes state employees deserve a raise and said he would try to make that happen. But he’s unwilling to commit to 7 percent.

Same goes for Democratic candidate Mike McWherter. “A 7 percent increase in almost any company — privately-held or public-sector right now — would be very difficult to achieve unless the revenue picture just drastically turns around, and I don’t see that happening,” he said.

Nevertheless, McWherter said giving state employees a little something extra — a smaller raise or maybe a bonus — would be a priority under his administration. And he went out of his way to declare his solidarity with the union during the Knoxville gubernatorial debate last week. The first thing the Jackson beer distributor and son of a former governor said he would do upon assuming the state’s chief-executive job would be to “join the Tennessee State Employees Association.”

“We’re going to lose huge institutional knowledge to the private sector if we do not address their needs. I want to join their association so they know I am one of them,” McWherter told the audience at the University of Tennessee.

In addition to larger paychecks, the association wants the state to split employees’ health care premiums down the middle, which would cost another $54 million, according to the association.

Health costs for state employees have climbed 6 percent to 9 percent a year for the last three years, according the TSEA, and without a raise, workers have had to pay the increases on their own.

But even with the out-of-pocket contributions from state employees, Bredesen was observing that Tennessee taxpayers’ share of government workers’ medical coverage represents “a big pot of money.”

State employees salaries and benefits rung up at an estimated $2.8 billion last budget year, according to the Department of Finance and Administration. The total state budget for fiscal year 2010-11 is $29.8 billion.

In the current economic environment, state employees who don’t get laid off ought to count themselves lucky to have a steady job, said Stacey Campfield, a House Republican from Knoxville running for state Senate. Government employees insisting on raises now is a little impractical, he said.

“They can look for a 7 percent raise next year, but I’m looking for a unicorn and a rainbow that drops golden bars from heaven,” he said. They may deserve a raise, he added, but “I just don’t see that as happening,” even at a lower level.

Randy Walker, Campfield’s Democratic opponent, called it “cowardly” to deny state workers annual cost-of-living adjustments. Lawmakers could dig deeper in the budget to find the money, he maintained.

“Zero is unreasonable,” said Walker. On the other hand, 7 percent in one year might be a little much, he added.

State employees’ average pay was $37,727 in the 2008-09 budget year, the latest year available. Private- and public-sector workers throughout the state averaged $40,242 in 2009, according to the state Labor Department. A 7 percent boost would raise average government-employee compensation to $40,367, or $125 higher than the private-sector average.

Tennessee’s most recently reported statewide unemployment rate was 9.6 percent, according to the Labor Department.

While TSEA’s leadership says it’ll fight hard for raises, they’ve been disappointed before. Earlier this month, Bredesen’s administration sent agency directors a letter saying a wave of bonuses intended to hit their bank accounts this fall just isn’t in the fiscal cards.

The bonuses were tied to the state collecting an extra $50 million in tax revenue above what it projected in the 2009-10 budget year. Instead, revenues fell $39 million short of the state’s estimate. Bredesen subsequently cancelled the bonus, which would have given employees $50 for each year of service with a minimum payment of $150 and a maximum of $1,250.

TSEA officials say they’ve chosen to endorse candidates who generally favor raises for state employees. However, O’Connell said, they’ve gotten no guarantee that those lawmakers who they’ve already endorsed this year would support an increase of 7 percent.

“All we can do is exercise any political clout that we may have in the future,” he said, adding that the association plans to ask members to call the politicians it has endorsed and ask whether they support the proposed raises. “We are not expecting that we are going to fail.”