Metro Pulse/Insights/Sales Tax

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by Joe Sullivan

The state Legislature is heading into its familiar end-of-session group grope. It's the kind of familiarity that breeds contempt for the inability of our elected representatives to come to grips with the deepening financial hole into which the state has dug itself.

Last year the fiscal shortfall which the Legislature attempted to cloak with smoke and mirrors was only $350 million. This year it's up to $800 million, and there's scarcely anyone left in legislatorland who doesn't know that real revenues have to be raised to cover it. But how?

Last week the state Senate approved a 1/2 percent increase in the state's 6 percent sales tax that would raise close to half of the $800 million needed. But, no, they didn't really mean it, several of the senators in the bare majority of 17 who supported the increase said. It was just a hold-your-nose way to get something through the Senate that could become the legislative vehicle for getting together with the House of Representatives on some better way to solve the problem.

Over the weekend, in hopes of finding a consensus, each of the 99 members of the House was charged with deciding on a preference among: (1) a sales tax increase; (2) a state income tax coupled with eliminating sales taxes on groceries, apparel and non-prescription drugs; and (3) extension of the sales tax to services not now covered and/or a gross receipts tax on their providers. When the returns came in on Monday, there were thirty-some votes for each. In other words, no consensus.

So what does the House do? On Tuesday, its Finance, Ways and Means Committee approved a phantom revenue bill with the Senate's sales tax increase stripped out. The full House was expected to follow suit on Wednesday. But, no, they didn't really mean it either. It was (guess what?) just a vehicle for getting a bill through to make a procedural connection with the Senate-passed bill.

The task of somehow making sense out of all this nonsense now falls to a House-Senate conference committee composed of a handful of "leaders" of each body. Over the next few days, or weeks, the committee must come up with a real way to balance the state's budget prior to the start of its new fiscal year on July 1.

As we've said so many times before in this column, an income tax is by far the most equitable and efficacious way to resolve the state's fiscal woes. Only an income tax with high deductibles would shift some of the burden of shoring up this laggard state to all Tennesseans with higher incomes. This burden is now borne unduly by lower-income households because of the state's gross overdependence on the sales tax. The sales tax consumes a much higher percentage of the incomes of those who can least afford it because it only applies to goods, whereas those with higher incomes generally spend a higher percentage of their outlays on untaxed services. So a high-bracketed income tax is anything but a soak-the-rich scheme.

Moreover, none of the 42 states with an income tax suffers from Chronic Fiscal Deficiency Syndrome the way that Tennessee does. That's because income tax proceeds keep pace with growth in the economy whereas sales tax proceeds don't, as more and more people have (as a percentage) less and less of their incomes subject to taxation. The experience of those other 42 states refutes the shibboleth that any income tax initially enacted would represent a stepping stone toward getting a bigger and broader one in the future. No other state has raised its income tax in the past decade, and most have lowered them as the good times have rolled—until just recently.

The focal point of progressive tax reform efforts at this time is a bill co-sponsored by Democrat Sen. Bob Rochelle of Lebanon and Rep. Tommy Head of Clarksville along with Republican Sen. Gene Elsea of Spring City. The Rochelle-Head-Elsea bill would couple a multi-bracketed income tax (with rates ranging from 3.5 percent to 6 percent) with the removal of sales taxes on groceries, apparel and non-prescription drugs.

A study by the Tennessee Advisory Commission on Intergovernmental Relations shows that well over half of Tennesseans would pay less in state taxes than they do at present. Moreover, a poll just completed by an advocacy group, Tennesseans for Fair Taxation, shows that 58 percent of the public now favors an income tax as part of a tax reform package along the lines of Rochelle-Head-Elsea.

You'd think that would be enough to get the conference committee's attention, especially since all three of them figure to be conferees. But leaders must have followers—specifically 50 of them in the 99-member House and 17 in the 33-member Senate. Followership remains hard to come by as a lot of rank-and-filers still cling fearfully to the conventional wisdom that a vote for an income tax will be political suicide for them.

If enough votes can't be mustered for an income tax, then extension of the state's revenue net to presently untaxed services or their providers is the next best choice. Legislation crafted under the auspices of the chairman of the House Finance, Ways and Means Committee, Rep. Matt Kisber of Jackson, would extend the 6 percent sales tax to some set of businesses while imposing a 2 percent gross receipts tax on providers of professional services. Construction services would account for the bulk of the $600 million revenue take projected from sales tax extension, but powerful contractor lobbies are expected to bulldoze it. On the other hand, at least some professional associations may not be so resistant to a tax on their gross receipts.

Doctors, lawyers, accountants, architects, consultants and engineers have been the state's most artful tax dodgers—and they know it. They've managed to organize their practices so as to escape the business taxes to which corporations generally are subject. But the projected take from a 2 percent tax on them is only $200 million, far short of the total needed.

Fortuitously, the state has collected $360 million in tobacco settlement payments over the past year and is due to collect another $160 million in the fiscal year ahead. The Tennessee Farm Bureau and anti-smoking activists have tried to get this money dedicated to agricultural boondoggles and ineffectual smoking prevention programs, while others have sought to conserve it in trust funds on grounds that it represents too uncertain a funding source to pay recurring expenses. But the payments will continue as long as people keep on smoking cigarettes. The only risk of discontinuation is tobacco industry bankruptcies, which just might be less likely than the state going bankrupt if its financial deterioration continues. The settlement money should be used to cover budget shortfalls both now and in the future, at least until the state gets in better shape.

Other revenue-raising possibilities exist that at least wouldn't compound the damage done by the state's present overdependence on the regressive, inelastic sales tax (to use the lexicon of economists). An increased automobile tax might even be moderately progressive, for example, if it were based on the value of a car. New Lexus owners would pay up; old Mazda owners might even get a break.

The one way not to go, as expedient as it may seem, is to subject Tennesseans to the inequities and distortions that would be caused by a sales tax increase.