Posted on 05/21/2002 5:29:31 AM PDT by GailA
Editorial 5/21: Why block state tax relief for so many?
May 21, 2002
STATE LAWMAKERS will try again this week to enact a plan that would cut taxes for as many as three of every five Tennessee taxpayers. What a dirty trick that would be.
An analysis prepared for Tennesseans for Fair Taxation, a tax reform advocacy group, concludes that a proposal sponsored by state House Speaker Jimmy Naifeh (D-Covington) would mean lower state taxes overall for nearly all Tennessee families that earn less than $62,000 a year - 60 percent of the state's households.
It would do so by eliminating state and local sales taxes on most groceries, clothing and non-prescription drugs, and repealing the special state tax on investment income. At the same time, the plan would impose a 4.5 percent state income tax with generous personal exemptions.
The plan would bring greater equity to one of the most unfair state tax structures in the country, which places a disproportionate tax burden on middle income, working class and poor families. By reducing excessive reliance on regressive sales taxes, the proposal would better equip Tennessee's tax system to meet the state's basic needs in such areas as education, health care and public safety, and to grow along with the state economy.
The plan represents an overall tax increase of about $1.1 billion, and it would be pointless to deny or minimize that fact. But even a tax hike of that magnitude would do no more than return Tennessee to where it was four years ago in terms of the taxes it collects as a percentage of personal income. Tennessee would remain one of the lowest taxed states.
The General Assembly's refusal to enact tax reform over the past four years has effectively amounted to a large and regressive tax cut that has wreaked havoc with the state budget. The effects of that default are evident in such things as rapidly rising tuition at state universities and colleges, closed state parks and a lowered state credit rating. It also has created an ocean of red ink in state ledgers - a $480 million deficit this year, a budget gap of as much as $1.4 billion next year, within projected state revenues of $9.6 billion.
Opponents of the Naifeh plan complain that it would be merely the first phase of a never-ending expansion of state income and sales taxes. But the proposal mandates rebates to taxpayers anytime state tax collections reached 6 percent of statewide personal income. That rate is about 4.9 percent now, and would rise to about 5.7 percent under the Naifeh plan. (The national average is about 7 percent.)
Even before they considered the tax proposal, House members voted last week to amend the state Constitution to require a "super-majority" (three-fifths) vote of both houses of the legislature to raise the sales or income tax rate, or remove any exemptions, deductions or exclusions related to those taxes.
That is a potentially dubious change; it could allow a minority of lawmakers to set policy for the state. But it reflects a clear desire to respond to one of the major objections to the tax plan.
A failure to pass tax reform now, amid a deepening revenue crisis, could deprive the state of its last opportunity to salvage TennCare, a program that has saved, not cost, taxpayers money while providing health insurance to many more low-income and chronically ill people. TennCare still needs thorough administrative reform, but it does not need to be killed.
The failure of tax reform also would obstruct efforts to improve Tennessee public schools so they can keep pace with the demands of a global workplace, and could instead lead to teacher layoffs and larger classes.
Those critics of tax reform, including gubernatorial candidates, who insist the state can balance its budget by cutting spending alone remain free to show how that would be done. But since they haven't responded to that challenge in four years, there is no reason to expect them to do so now. Meanwhile, the Naifeh plan remains the best available option.
ANTI TAX rally in Nashville at Legislative Plaza TOMORROW Wed May 22. House convenes at 10AM
Steve Gill said this morning Senators Ben Atchley (R) and Doug Henry (D) need leaned on.
NASHVILLE - Republican state Reps. Bob McKee and Chris Newton could have done what so many of their colleagues have done: sit back, stay quiet, offer no solutions and take no responsibility for solving Tennessee's revenue crisis.
The easy way out for lawmakers - perhaps the only one in the current crisis - is to refuse to support an income tax in any form, say you'd vote for some vague alternative, and then try to duck any responsibility for the draconian budget cuts that will follow when no substantial tax increase passes.
But the two plain-spoken East Tennesseans aren't the sort to duck and weave, which is why they have risked their political lives to come up with an alternative - as workable as they could make it - to House Speaker Jimmy Naifeh's income tax plan. Their bill embodies the tax reform concept that many of their fellow anti-income-tax lawmakers have said they could support: broadening the state sales tax to most services and to some goods that are now exempt by state law.
Most of them probably figured no one would actually develop and put his name on such a politically dangerous measure, let alone put it up for a vote. But that's exactly what McKee and Newton have done. The bluff has been called, and regardless of your opinion of the merits of the McKee-Newton plan as tax policy, you have to admire their chutzpah.
"It's put-up-or-shut-up time," Newton said. "There are a lot of folks here who talk about a lot of things, but won't put their name on anything and won't vote for anything. Well, this is their opportunity."
McKee and Newton concede their tax plan isn't perfect. It would put Tennessee's tax structure even more out of step with neighboring states than it is now. The details of how it would be implemented and enforced are sketchy. And because no other state levies a broad sales tax on services (a handful have low gross-receipts taxes on service businesses), there's no template for Tennessee to use.
By putting a major tax alternative forward, both lawmakers know that their political opponents will charge they're tax-and-spend liberals, which they are not. Because their plan would have a huge impact on business interests statewide, they may also have hurt their ability to raise campaign money to fight off those attacks.
Other anti-income-tax lawmakers whose refusal to join the Do-Nothing Caucus merit mention here as well:
Rep. Frank Buck (D-Dowelltown) has put forth a plan that would extend the Hall tax on investment income to 50 percent of capital gains and would increase "sin taxes." He reasons that alcohol and cigarettes cost the state in sickness, crime and family distress and should be taxed more, and that the state Constitution plainly allows taxation of investment income.
Sen. David Fowler (R-Chattanooga), a darling of the political right, has put forth a complicated plan that would tax services until a referendum could give voters a choice between service taxes and income-tax-based reform, and would call a constitutional convention on taxes. It's a sincere effort, but so complex that most legislators treat it as a last-ditch option.
Rep. Keith Westmoreland (R-Kingsport ) came up with a "singular exchange tax" - another one-of-a-kind option - and then boldly announced that if it goes nowhere, he's prepared to vote for Naifeh's plan to keep the state afloat.
Even conservative Rep. Bill Dunn (R-Knoxville) stepped forward with a package of sin taxes, which he admits would not do enough to solve the state's revenue problems but says,"people are asking what we can be for, and I'm for this." It's no profile in courage, but it's more than many of his colleagues have done.
Lawmakers who claim the state just needs to cut out waste have been invited, even implored, to sift through the budget and identify potential cuts. At first, many said they needed more time to study the issue. Fair enough. But it has been four years, and those budget cutters have yet to come forward with substantial, workable reductions they'd be willing to put their names on and put up for a vote.
The only substantial plan for cutting the state budget to "live within our means" is the very sketchy, very scary DOGS (Downsizing Ongoing Government Services) program that no one claims to be willing to support. And no wonder - DOGS would cut $400 million out of education, cut 400,000 people off TennCare, eliminate the departments of economic development and tourism, and close parks. No one has stepped forward with other cuts that are any more appealing.
It amazes me that many Tennesseans still believe this crisis is a fiction - that all the legislature has to do is cut out superfluous spending and voila! the issue goes away.
It has "gone away" the past few years because the state has fudged revenue estimates and spent one-time money and savings to fund ongoing expenses. This year's budget is $480 million in the red, and the structural deficit (the hole dug by the fact that we have ongoing costs but have spent all our savings) is now more than $750 million. Increased costs of security, employee insurance premium hikes, normal cost growth in education, corrections and other areas, court-mandated improvements and medical inflation and stabilization costs of TennCare boost that figure over the $1 billion mark.
It should be obvious by now that if there were an easy way out of this mess, state lawmakers would have taken it. People such as Naifeh, Sen. Robert Rochelle, Sen. Gene Elsea, McKee, Buck, Newton, Fowler, Rep. Randy Rinks and others wouldn't have risked their political skins to push new taxes, and Gov. Don Sundquist would not have made himself a pariah in his own party.
More than a few lawmakers here understand the need for tax reform, and fear for the state's future because of the revenue crisis, but won't vote for reform because they're scared of political opposition.
My only response is to ask why they'd want to be re-elected to preside over the coming mess.
"You're either part of the solution or you're part of the problem," Newton says. "Now it's time for each of us to decide which we're going to be."
Paula Wade is a reporter in The Commercial Appeal's Nashville bureau. You can reach her at (615) 242-2018 or contact her by E-mail at wade@gomemphis.com.
Hilleary calls for independent audit of state government
By TIM WHALEY
BRISTOL, Tenn. - Republican gubernatorial hopeful U.S. Rep. Van Hilleary continued to lob shells into the continuing state budget fray, saying Monday that the entire state government should be audited by someone independent of legislative leadership.
Addressing the Bristol Republican Women's Club, Hilleary responded to an audience question about the potential for auditing the use of funds by the Tennessee Department of Education. Hilleary said he would go further.
"The whole state government needs to be audited to examine how we're doing things, and I would want that audit conducted by someone who does not work for (House Speaker) Jimmy Naifeh," Hilleary said.
Hilleary also made a point of saying that state lawmakers have few resources to use when grappling with state budget numbers.
For instance, Hilleary noted that state Sen. Ron Ramsey, R-Blountville, is chairman of the Environment, Conservation and Tourism Committee yet has only one research analyst.
In the House, there is only one secretary for every two representatives.
Hilleary said this means the governor's budget staff essentially calls the shots.
When asked after his address if local legislators have been duped, Hilleary only said some lawmakers have had "difficulty getting good numbers to offer alternative solutions from."
Hilleary's local legislative supporters - including Ramsey and Reps. David Davis, R-Johnson City, Steve Godsey, R-Blountville, and Jason Mumpower, R-Bristol - have all said they believe the state's deficit requires at least $700 million in cuts or tax hikes to enact a no-frills 2003 budget that mirrors the 2002 service and benefit levels.
All five lawmakers agree TennCare costs are running too high.
Using a chart, Hilleary told the audience that the state will spend $400 million more this year on TennCare than it would if growth had been held to that of the average Medicaid growth.
The state must find $450 million just to close the books on this year's budget.
Hilleary also said prescription drug costs jumped 224 percent in a single year.
TennCare pharmacy costs jumped two years ago with a court order that barred managed care organizations from denying prescriptions while appeals are under way.
Replying to another audience question about the lack of state help for more than 1,000 mentally handicapped residents, Hilleary suggested that streamlining TennCare should save money that can be made available for other uses.
But Hilleary, who says his sources indicate that as many as 110,000 persons are ineligible for the program, has also said TennCare savings would be sufficient to shore up the state budget.
TennCare has 1.4 billion (typo this should read MILLION) enrollees, of which 900,000 are federally entitled to the program.
"I do not think it is hard-hearted to say if you are not eligible for the program, you can't be on the program," Hilleary said.
Several TennCare changes Hilleary supports go into effect July 1, including a lower level of benefits for non-Medicaid enrollees and use of an independent underwriter to determine medical uninsurability.
Hilleary said since TennCare was enacted by the governor's executive order in 1992, only the governor can change the program.
"The good news is, I know how to fix it," he said during his address.
However, after the meeting, Hilleary said an advisory committee he established is having difficulty developing policy proposals for TennCare because changes are proposed as soon as Hilleary's group works in a specific direction.
The latest state stabilization plan for TennCare involves the state taking full financial risk for medical care under the program, relieving managed care organizations from that risk of loss.
Hilleary did offer smart-card technology - essentially an identification card with data storage chip embedded - as a way to ensure TennCare enrollees are not obtaining more medical and prescription benefits than they are entitled to.
Hilleary's other visual aid for the audience was an illustration showing state revenue collections have outpaced inflation plus population growth by a margin of $260 million over the past eight years or so.
But Hilleary's chart didn't note that K-12 education funding increases required during that same time period to fulfill the promise of the 1992 Education Improvement Act exceeded $260 million alone.
Ramsey has also stated in prior interviews that the state "doesn't send people to prison based on the rate of inflation."
In other campaign matters, Hilleary said the emergence of a contested GOP primary for the U.S. Senate seat being vacated by Sen. Fred Thompson has hurt his fund-raising efforts.
"Have we seen a difference? Yes, we have," Hilleary said.
In that Senate primary, former Gov. Lamar Alexander and his extensive fund-raising network are squaring off against 7th District U.S. Rep. Ed Bryant.
Hilleary obliquely noted that funding struggle, asking Monday's audience for their "thoughts, prayers, vote, and of course, money."
http://www.tennessean.com/local/archives/02/05/17773565.shtml?Element_ID=17773565
By DUREN CHEEK Staff Writer
The legislature's ''working days'' are dwindling down to a precious few — three to be exact — and some lawmakers are talking privately about a special legislative session if a tax plan cannot be passed during one of two floor sessions scheduled this week.
The fact that both the House and Senate have scheduled meetings for Wednesday and Thursday would seem to indicate that House Speaker Jimmy Naifeh is poised to try to pass his proposed 4.5% flat-rate income tax this week.
The Tennessee Constitution provides that the legislature can spend 90 days in regular session over a two-year period. Lawmakers will use day 88 tomorrow and day 89 on Thursday. Committee days — typically all day on Tuesdays and a half day on Wednesday — do not count in the 90.
Also on the table is a proposal by two Eaststate Republicans, Reps. Bob McKee of Athens and Chris Newton of Cleveland, to levy the state sales tax on many items that are specifically exempt by law as well as on most services that are not now taxed.
Legislative leaders insist there are no plans for a special session.
Naifeh, a Democrat, insists he has no such plans.
''Lord, I hope not,'' said Rep. Matt Kisber, chairman of the House Finance Committee.
But the fact remains that the legislature is running out of time to close the budget on this fiscal year, which ends June 30, and to meet its constitutional mandate of a balanced budget for the next year.
Lawmakers appear ready to raid reserve funds to come up with the $480 million necessary to close out this fiscal year.
Officials are now estimating it would require finding $1.5 billion in new revenue to fund Gov. Don Sundquist's budget requests for 2002-03. (MY NOTE this started out as a $1.1B need, now its grown to $1.5B)
Naifeh estimates his proposal would bring in about $1.1 billion. (MY NOTE: Steve Gill said this morning with all 5 taxes in the package it would bring in about $1.8 Billion!) McKee and Newton estimated that their bill would bring in a similar amount but dropped the estimate to about $759 million after recalculations.
Naifeh said late last week that he is revising his proposal to include higher taxes on cigarettes, whiskey, beer and wine.
The income tax would provide for exemptions of $15,000 single, $30,000 married filing jointly and $1,500 per dependent. Other provisions would remove sales tax on groceries, clothing and nonprescription drugs.
As Steve pointed out, she spent the entire show attacking Steve rather than supporting her views. She said that Steve was lying, that he was just in it for the ratings, etc. Steve stuck to the facts any destroyed her. Steve said that if an income tax is as popular as Ms. Eackles claims, then if he was going for ratings, he would be pro-tax. Since the majority of the people are not po-tax and Steve is not in it just for the ratings, both parts of her argument are invalid.
April 30, 2002
http://www.gomemphis.com/mca/local_news/article/0,1426,MCA_437_1117488,00.html
The pro-tax reform group Tennesseans for Fair Taxation has an online calculator on which you can figure your tax liability and savings on both the graduated income tax proposal and the flat-rate income tax proposal. It is available at http://www.yourtax.org/calculator.
How would tax plan affect your wallet?
By Richard Locker
locker@gomemphis.com
April 30, 2002
NASHVILLE - The Tennessee legislature is reviewing a plan that would enact a 4.5 percent flat-rate income tax and remove the state sales taxes on grocery food, clothing and nonprescription drugs.
The plan would exempt from the state income tax the first $15,000 in income for single taxpayers, $30,000 for married couples and $22,050 for single heads of household, plus $1,500 for each additional dependent.
And it would repeal the existing 6 percent income tax on stock dividends and certain other investment income. Investment income would be subject to the new state tax, except that 50 percent of taxable capital gains would be exempt.
Although a majority of lawmakers have expressed opposition to an income tax, there is a growing sense of urgency to find new sources of revenue to plug a $480 million deficit in this year's budget and pay for new spending that officials say is needed.
How would the income tax proposal work and how would it affect you? Here are questions and answers to help you figure it out:
Q: What income would be taxable?
A: Your "adjusted gross income" as figured on your federal income tax form, minus the state exemptions and deductions. Adjusted gross income includes total taxable income minus several deductions, such as some individual retirement account contributions and alimony payments.
Q - How can I figure my state income tax liability? A - Take the "adjusted gross income" figure from your federal tax return (Line 33 on Form 1040). Subtract one-half of the taxable capital gains listed on Line 13 of Form 1040. Then subtract your household's state exemptions ($15,000 for a single taxpayer, $30,000 for a married couple, $22,050 for a single head of household, and another $1,500 for each dependent).
The resulting figure is your state taxable income. Multiply that by 4.5 percent (.045). The result is your state tax liability for the year.
Q - Would I have to pay that all at once?
A - There would be payroll withholding for the state tax. If you have too much money withheld, you would receive a refund from the state. If you do not have enough withheld, you would owe the balance when you file your return.
For taxpayers with large investment income, the state would require quarterly estimated tax payments.
Q - How are capital gains treated differently under the proposal than under the existing investment income tax? A - Under the current Tennessee "Hall" income tax - which taxes stock dividends and certain interest - the only capital gain distributions that are taxed are those from mutual funds. They are taxed at 6 percent, minus some exemptions.
The proposal would tax capital gains that are subject to the federal income tax, including gains on the sale of stocks but not on the sale of most residences. Capital gains would be treated as regular income subject to the 4.5 percent rate, except that only half, or 50 percent, of capital gains would be taxed by the state.
Q - Would Social Security benefits be taxed?
A - Yes, to the extent that they exceed the state exemption levels and if they are taxed on your federal income tax return.
Q - What about other pensions and retirement pay?
A - If they are taxable on the federal tax form, they would be included for figuring your state taxes.
Q - What about IRAs? A - Since most withdrawals from Roth IRAs, including the earnings, are not taxable under federal tax law, they likely would not be taxable under the state plan. Withdrawals from regular IRAs are generally subject to federal income taxes and would be taxable under the state tax, to the extent that total income exceeds the state exemption levels. Q - Can I deduct what I pay in state income taxes on my federal income tax return?
A - Yes, if you itemize deductions on your federal tax return. But it is a deduction, not a credit, and therefore is not a dollar per dollar offset. If you pay $700 in state income taxes, you deduct $700 from your income on your federal tax form, not from the federal taxes you owe. If you are in the 28 percent marginal federal tax bracket, your federal income tax would be reduced by 28 percent of your state income tax bill.
Q - How many Tennesseans itemize on their federal tax returns?
The pro-tax reform group Tennesseans for Fair Taxation has an online calculator on which you can figure your tax liability and savings on both the graduated income tax proposal and the flat-rate income tax proposal. It is available at http://www.yourtax.org /calculator. A - State officials estimate about 20 percent of Tennessee federal tax filers itemize. They believe that percentage would rise to 30 percent if there is a state income tax. State officials estimate that the value of the increased federal deductibility to Tennessee taxpayers as a whole at $400 million.
Q - What kind of sales tax break can I expect from removing sales taxes from grocery food, clothing and nonprescription drugs? A - The University of Tennessee Center for Business and Economic Research just released new estimates of the savings to taxpayers from removing state and local sales taxes from food and apparel. UT did not include estimates for over-the-counter drugs. The estimates are based on the average Tennessee combined sales tax of 8.4 percent (the rate is 8.25 percent in Shelby County). UT estimates, for example, that a family of four with an annual income of $40,000 to $50,000 would save about $500 a year in sales tax payments. Q - What about prescription medicine? A - They're already exempt from sales taxes. Q - What guarantee do I have that the state won't raise the tax rates or reduce the exemption levels once they are in effect?
A - There is no guarantee. But the General Assembly has set in motion a proposal to amend the Tennessee Constitution to require a three-fifths majority vote in both houses of the legislature to raise the income tax rate, the sales tax rate or to alter the exemption levels of the income tax. The earliest that could be enacted is 2006, when voters could ratify it in a constitutional referendum. Q - Would there be any other checks on the growth of taxes? A - Another provision is aimed at limiting the growth of government. It says that the state can't spend more from state tax revenue than 6 percent of the Tennessee economy, to be defined as either gross state product or Tennesseans' total personal income as defined by the U.S. Department of Commerce. If spending exceeds that level, the excess would have to be rebated to taxpayers. If the cost of a rebate is more than the rebate, the excess would be placed in the state's Rainy Day Fund.
Q - What if I live in Arkansas or Mississippi and work in Tennessee?
A - You would pay the Tennessee income tax on your earnings in Tennessee and take a dollar-per-dollar credit against it on your home state's income tax return. Tennessee expects to collect about $100 million from out-of-state residents who work in Tennessee.
Q - What if I live in Tennessee but work in a neighboring state?
A - You continue to pay state income tax to the state where you earn the income and you take a dollar-per-dollar credit for it on your Tennessee income tax. Because most surrounding states have slightly higher income tax rates and much lower exemption levels, you would likely owe little if any additional Tennessee tax, unless you have large amounts of investment income.
Q - Are the exemption levels of $15,000, $30,000, $22,050 and $1,500 for each additional dependent indexed? That is, do they increase with the cost of living every year?
A - Unfortunately for taxpayers, the exemption levels are not indexed under the current proposal. So as inflation occurs, the real value of the exemption declines.
Contact Nashville Bureau chief Richard Locker at (615) 255-4923
When the Tennessee Constitution was adopted in 1870, Article II, Section 28, contained the sentence,
"The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem."
In 1932, in Evans v. McCabe, 52 S.W.2d 159, the Tennessee Supreme Court held that that sentence "conferred upon the Legislature the power to tax only one class of incomes", and "necessarily denied to the Legislature the power to tax incomes of other classes", and, therefore, that a tax on personal income enacted by the Legislature was unconstitutional.
In 1960, in Jack Cole Co. v. MacFarland, 337 S.W.2d 453, and in 1964, in Gallagher v. Butler, 378 S.W.2d 161, in unanimous opinions by the five judges, the Supreme Court quoted with approval and followed the ruling of the Supreme Court in Evans v. McCabe. Thus, in those three cases, the Tennessee Supreme Court unanimously ruled that a tax on any class of income other than the income from stocks and bonds is prohibited by the Tennessee Constitution.
The current Attorney General is arguing that a person's work is a privilege and not a right. Just as other privileges are taxed, in his mind, our privilege of working must be taxed also.
link: THE CONSTITUTIONALITY OF THE PROPOSED TENNESSEE INCOME TAX
This is a KEY phrase that MUST be NOTED: If spending exceeds that level, the excess would have to be rebated to taxpayers. If the cost of a rebate is more than the rebate, the excess would be placed in the state's Rainy Day Fund.
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