Revenue Options

Tax cut and Job Creation Bill (SB3236/HB3596)

Tax Cuts

SB3236/HB3596 will eliminate the state part of the sales tax on grocery food, leaving the local option unaffected. The bill will reduce the sales tax rate on other items from 7% to 5%. The Hall Income Tax will be eliminated and the unearned income subject to the Hall tax will be subject to a new, broad-based income tax with generous exemptions and a 3% rate on the first $30,000 over the exemptions and 6% on amounts over that.

State and local taxes would be reduced for those in the lowest 20% of the population by income from 11.7% to 9.7%, for the middle 20% from 9.3% to 8.0% and for the top 20% will be slightly increased from 4.5% to 7.0% -- significantly reducing, but not altogether eliminating the inequalities in our tax structure. The bill will benefit businesses by removing the real estate base from the Franchise tax and cutting the rate in half. With all these cuts, according to the Institute on Taxation and Economic Policy, the bill will still produce about $400 million in additional revenue for the state because it allows those who have the ability to pay, who have benefited from the prosperity that our system of government supports, to contribute more to their own well-being.

Job Creation

What the Tennessee economy needs to recover from this recession is more consumer spending. The tax cut effects of this bill will leave more money in the pockets of hardworking citizens who are struggling to make ends meet and still provide the necessities for their families. The money would be spent on necessities that have been deferred during the recession and would recirculate in the economy, resulting in job retention and creation because of the increased demand for goods and services. The tax increase on upper income taxpayers would affect savings but would have a negligible effect on spending.

The additional revenue will allow us to avoid layoffs of state employees and cuts in funding to critical government functions, further ameliorating the effects of the recession and assisting Tennessee’s economic recovery.

Potential revenue: $400 million

Out-of-state sales tax (SB1741/HB1947)

Ø The state sales and use tax is the largest source of funding for Tennessee state government.

Ø In order to fund our public structures adequately we need to be really efficient at collecting the taxes that are due.

Ø Tennessee is not collecting sales taxes on a significant portion of the purchases made by state residents and businesses. We rely on individual taxpayers to voluntarily report their purchases from out-of-state vendors who do not collect Tennessee sales taxes. About 2500 taxpayers filed use tax returns last year. There are over 3.1 million individual federal tax returns filed by Tennesseans each year.

Ø A report from the UT Center on Business and Economic Research entitled “State and Local Government Sales Tax Revenue Losses from Electronic Commerce”, dated April 13, 2009 estimates that for 2010 $310 Million will be lost through purchases from Internet vendors by Tennessee residents. That does not include losses from mail order, direct television marketing or cross-border shopping

Ø The Internet Parity Act, SB1741/HB1947, as amended, will improve collections by requiring out-of-state sellers who sell more than $10,000 of merchandise to Tennesseans and do not collect sales tax to notify their customers at the time of purchase that they may owe sales (use) taxes to Tennessee. They will also be required to report annually to each purchaser and to the state Department of Revenue the total of their purchases.

Ø Vendors may avoid the reporting requirement by collecting and remitting the sales taxes.

Ø The revenue this will produce can be used to avoid layoffs of state employees and cuts to critical state functions.

Ø If purchasers elect to patronize Tennessee businesses instead of out-of-state businesses, that will help the local economy and still increase state revenue.

Ø This is not a new tax. It is only improving collections for a tax that is already on the books.

Ø Failure to pass this bill would, in effect, be continuing to enable tax evasion.

Ø If Amazon terminates its relationship with third party affiliates in Tennessee, that will be a clear indication that tax evasion is an essential part of their business model. That would make them a rogue business.

Potential revenue: uncertain, but not significant in FY 2011

Single article cap: Technical Corrections bill (SB3901/HB3787)

Existing Tax

Tennessee levies a 7% tax on sales of most merchandise and some services. Local governments are allowed to charge additional taxes up to 2.75% on the first $1600 of the purchase price. For items priced between $1600 and $3200, the state levies a 9.75% tax on the amount over $1600 with no local option tax. For items priced over $3200, the state levies a 7% tax on the amount over $3200. The average combined rate for Tennessee is 9.4%.

Governor’s Proposal

The Governor has proposed to eliminate the cap by extending the 9.75% rate to the full value of all “big-ticket” items except vehicles, mobile homes, manufactured housing and boats.

TFT’s Position

TFT has supported complete elimination of the “single article cap” for years. The cap is an unjustified tax break for upper income individuals and businesses. If the buyer can afford to buy items that cost more than $3200, he or she can afford to pay tax at the same rate as everyone else. There’s no good public policy reason not to eliminate the cap on all purchases. However, the Governor’s proposal does meet the requirements of the Streamlined Sales Tax Agreement, eliminating one of the two current obstacles to full compliance by Tennessee.

Potential revenue: $80 million

Combined reporting: Technical Corrections bill (SB3901/HB3787) vs. Food and Business Tax Fairness Act (SB0502/HB1350)

We commend the administration for trying to close the captive REIT loophole, and we support this.  Nevertheless, it should be understood that this is an ad hoc, loophole-by-loophole approach to reducing corporate tax avoidance.  Policymakers in an increasing number of states are recognizing that this approach always leaves them one step behind the smart and highly-compensated lawyers and accountants who dream up these schemes, which is why a majority of states with Corporate Income Taxes have now abandoned this incremental approach and adopted the comprehensive approach of combined reporting.  TN should do the same, as we have been advocating for several years now. We urge you to take a close look at SB0502, which is already in Senate Finance. It accomplishes the goal of this measure and nullifies several other tax avoidance schemes.

Potential revenue: $10 million

Cable tax: Technical Corrections bill (SB3901/HB3787)

The existing tax on cable television programming exempts the first $15 of the monthly bill. There is no such exemption for satellite TV programming. The satellite companies have sued the state of Tennessee over this apparent unfair treatment. They are likely to prevail and the probable result would be a corresponding exemption for the satellite companies.

The administration has included a provision in the Technical Corrections bill (SB3901/HB3787) that will eliminate the exemption of the first $15 for the cable companies. If passed, this measure would render the satellite companies’ suit moot and increase state revenue, compared to the loss of revenue if the suit goes forward without this measure.

Potential revenue: $24 million