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State Budgetary Woes Take a Toll

by Joe Sullivan

A weary Sen. Bill Clabough stretches out on the sofa in his senate office one evening late last week and reflects on the week's state budgetary proceedings, or lack of same.

"Coming over [to Nashville] on Monday I was pretty optimistic," the Maryville Republican recalls. "But every day since has been a larger disappointment, and now I'm about as pessimistic as can be."

Clabough and his office suite mate, Sen. Jerry Cooper (D-McMinnville), are as close as any pair comes in the splintered Senate to being bipartisan consensus builders. For the previous two weeks, they had nurtured plans for raising enough revenue to balance the state's budget by taxing services not covered by the state sales tax. One version would simply extend the sales tax to everything from haircuts to legal, accounting, and other professional services—but at a much lower rate, perhaps 1 percent. An alternate approach would be to impose the tax directly on service providers in the form of a gross receipts tax. Either way, the levy would raise about $285 million annually—just about enough to make up the shortfall in Gov. Don Sundquist's budget that the governor would have covered with his tax reform plan, which included a phobically opposed state income tax.

Because of lead times needed to prepare for collection of a tax on services, it was slotted to take effect next Jan. 1—meaning only half of the annual revenue boost would be realized in the state's new fiscal year beginning July 1. But since state revenues are exceeding budget by almost $100 million in the current fiscal year, this surplus can also go to cover the FY 2000-2001 shortfall on a one-time basis.

"We've reduced the baseline to where we need about $150 million, but we also want a revenue source that will get us back to covering recurring expenses with recurring revenues," Clabough says.

In collaboration with state Comptroller John Morgan, Clabough and Cooper made their pitch to an ad hoc group of senators just prior to the Memorial Day holiday weekend. "But when we came back on Monday, there just wasn't enough interest to pursue it," Clabough laments. "I'm not sure we had enough time to deal with the complexities posed by the new tax, and I'm not sure people are willing to make a commitment to tax reform that solves our structural problem with a tax base that isn't diversified enough."

Why wasn't more groundwork done sooner on revenue diversification options to spare legislators (not to mention the public) the group grope that's now going on to try to balance the budget by June 30 or else face a state government shutdown?

"Looking back, I wish that sometime in the past we'd done research on how a gross receipts or sales/use tax on services would be implemented," allows the bearded Morgan, who is widely respected for his mastery of state finances. However, as an original architect of the tax reform plan, later embraced by Sundquist, for combining sales tax reduction with an income tax, Morgan remains wedded to that approach as superior to all others. But when does it stand a realistic chance of overcoming the groundswell of ill-informed opposition it's incurred to date?

After a reflective pause, Morgan ventures that, "The last state to enact a personal income tax was Connecticut in 1991 after years of questionable budget practices followed by an economic downturn. If Tennessee experiences a recession...."

Meanwhile, the Senate Finance Committee, from which a budget must originate, has struggled to muster the six votes needed on that 11-member panel for even a regressive source of revenue, let alone a progressive one. It's not that the majority is opposed to any tax increase but rather that support is diffused among several different plans. Also "on the table" are alternatives that would (1) subject individual compensation in excess of $100,000 to the state's 6 percent tax on business income; (2) extend the 6 percent Hall income tax on dividends and interest to also cover capital gains on the sale of stock; or (3) compound the state's over-dependence on a regressive sales tax by tacking another 1/4 percent onto the present 6 percent rate. Each of these approaches is believed to yield the $150 million that the senators are looking for.

Finally, on Tuesday, the Finance Committee broke the deadlock by approving a progressive package that includes a 3 percent tax on capital gains and extension of the state's business (excise) tax to income of presently untaxed sole proprietors and partners in excess of $100,000.

The House has already cloaked itself in regressivity by making a 2 percent tax on electric and gas utility bills the main source of the $63 million in new revenue raised to balance the budget that won bipartisan House approval last week. To get the tab down to $63 million, the House whacked nearly half of the $113 million in additional funding sought by Sundquist as a first installment on a $440 million annual increase urged by a blue ribbon commission to get higher education in Tennessee up to the national norm. The House did, however, approve the full $192 million increase sought to make TennCare actuarially sound, along with full funding of the state's K-12 Basic Education Program, a 3 percent pay raise for state employees and a long-sought, long-term health care initiative.

The utility bill tax plainly represented the path of least resistance since lower income households who'll be hardest hit by it can't afford a lobbyist to fight it. Not even such usual champions of the working poor as Rep. Joe Armstrong (D-Knoxville) fought it in the end. "It was very difficult for me to support this budget, but I didn't want to be a party to bringing state government to a halt," Armstrong said after the House vote.

Yet even though a Senate majority can't agree on what they are for, they seem to be cohesive in their opposition to an energy tax. "At our joint leadership meeting, we told the House we would not go along with their energy plan," Clabough reports. Conversely, House leaders were outspokenly opposed to the sales tax increase that appeared to be the Senate's tax du jour on the day of the leadership meeting. And Sundquist has vowed to veto any budget legislation that includes either of them or otherwise flies in the face of his call for tax reform.

Out of such chaos, one can only hope that the Legislature will somehow manage to take an orderly step toward a sounder state tax structure rather than a stumble in the opposite direction.

June 8, 2000 * Vol. 10, No. 23
© 2000 Metro Pulse