TN TAX BATTLE: Sundquist says Tenn.crisis would be biggestsince the Civil War (RED ALERT)

By Richard Locker and Paula Wade locker@gomemphis.com wade@gomemphis.com June 26, 2002

NASHVILLE - Sundquist Administration officials are scrambling to put together a plan to continue essential state services in the event that lawmakers can't pass new revenue or a budget balanced with cuts.

''If there is no budget, it will be the biggest crisis in Tennessee since the War Between the States,'' said Gov. Don Sundquist, who said he will brief legislative leaders on his contingency plans today.

''It's a tragedy that it has come to this. We can't shut down state government, and it's my job to see that we keep essential services going.''

With only five days before the end of the state's fiscal year, House and Senate members are no closer to resolving the state's $975 million hole in the state's budget. Sundquist said Tuesday that he intends to call lawmakers into immediate special session in July if they fail to pass a full year's budget.

Sundquist said he was ''disappointed, but not surprised'' that legislators appear to be headed toward either a drastic reduction in state services or worse, a government shutdown. ''I don't think there's a plan that can get 50 votes in the House and 17 in the Senate.''

House Speaker Jimmy Naifeh still lacks three of the votes he needs to pass his tax reform proposal, and advocates of a patchwork sales tax-based plan say they are short of the votes they need as well.

The state Constitution says that the state cannot spend any money except by appropriation by the General Assembly, and if no budget passes by July 1, the state could not pay employees, contracts, or even utility bills. Sundquist is trying to fashion a stopgap budget to pay for critical services including staffing prisons and developmental centers.

Part of Sundquist's planning involves finding out the legalities behind what services are ''essential.'' For example, the state runs the risk of being sued for breach of contract if it fails to pay for contracted services, such as the contracts with TennCare MCOs. The state constitution would require the state to continue paying its judges, but wouldn't require that the other people who make the court system work - clerks, for example - must be paid.

''We're being asked new questions (about government shutdown scenarios) every 15 minutes, and they're questions for which there is no precedent. They never should have to be asked,'' said Atty. Gen. Paul Summers.

The legislature's work Tuesday indicated lawmakers are still far from agreement.

The Senate Finance Committee defeated the latest version of the sweeping tax plan proposed by Sen. David Fowler (R-Chattanooga) that would have raised $933 million from increases in numerous existing business and personal taxes. It would also have extended sales taxes to some untaxed services and items. It proposed to increase sales taxes to a uniform 8.75 percent statewide, increase vehicle registration fees, double the current $1,600 limit on single-item purchases that local sales taxes are applied to, raise the corporate excise tax from 6 to 6.25 percent and increase the cigarette and alcohol taxes.

Fowler's plan began last year as a proposal for an income tax with a constitutional convention call, but has evolved through multiple variations to become a patchwork quilt of taxes. Fowler garnered only two votes in the 11-member Finance Committee: Senate Republican Leader Ben Atchley of Knoxville and the committee chairman, Sen. Douglas Henry (D-Nashville).

The Senate panel had spent the major part of six hearings on the various incarnations of Fowler's proposal, whose final version is similar to the CATS (Continuing Adequate Taxation and Spending) plan being advocated by Rep. Frank Buck (D-Dowelltown) and Sen. Doug Jackson (D-Dickson).

The CATS proposal cleared the House Finance Committee Tuesday, and Buck said he ''presumed'' that it will come to a full House vote Thursday or Friday. CATS enacts a ''temporary'' statewide sales tax of 8.75 percent, increases excise taxes on business profits, makes several business tax changes that close tax loopholes, raises the one-time registration fee on truck trailers, taxes all cable and satellite TV service, and raises taxes on alcohol and tobacco. It raises an estimated $766 million.

''I do not want my vote to send this bill to the floor to be taken as a sign that I'll support it,'' said Rep. Kim McMillan (D-Clarksville), one of several committee members who oppose the CATS measure but want to give it a chance to pass on the House floor. Jackson did not move the companion bill through the Senate Finance Committee on Tuesday.

The House Finance panel also approved Buck's bill converting the state's existing professional privilege tax to a tax on income, a change that would invite a court challenge on the constitutionality of an income tax - an debatable question in legal circles.

House Speaker Jimmy Naifeh said he's still pursuing the 3 additional House votes he needs to pass his tax reform bill, and held a luncheon Tuesday for the 45 who voted for the measure May 22. Only 42 came - tax reform supporter Rep. Shelby Rhinehart (D-Spencer) was hospitalized Tuesday for a minor stroke but was listed in stable condition yesterday. Rep. Barbara Cooper (D-Memphis) is recovering from hip replacement surgery in Memphis. The other absent member is Keith Westmoreland (R-Kingsport), who committed suicide last week and whose replacement has not yet been named by the Sullivan County Commission.

''I wanted to get the group together to thank them for the brave stand they've taken for this state,'' said Naifeh. ''It's become a very tight-knit group. They're very comfortable with where they are because they know they did the right thing.''

Sen. John Ford (D-Memphis) resurrected his proposal for a flat-rate 2 percent income tax, coupled with a uniform, statewide 4.75 percent sales tax and no local sales tax. It would extend the new sales tax rate to all currently exempt services, including health care. Under Ford's plan, which would raise $1.2 billion in state revenue, cities and counties would continue to receive the revenue they would get if local sales taxes remained. The plan would tax all income above $12,000 per individual taxpayer and $17,640 for a single head of household.

The personal exemptions in Ford's proposal are lower than any of the other income tax plans on the table, but Ford said that lower-income people are eligible for such government services as TennCare and should be subject to a low income tax.

About 30 members of the NAACP marched to the War Memorial Plaza across from the State Capitol in support of tax reform including an income tax. "We believe Tennessee needs to be progressive rather than regressive," said Gloria Sweetlove of Brownsville, head of the Tennessee NAACP. She said the state needs adequate funding for education and health care.

http://www.knoxnews.com/kns/politics/article/0,1406,KNS_356_1230523,00.html

No real progress seen in budget, tax talks Crucial vote on CATS scheduled for today

By Tom Humphrey, News-Sentinel Nashville bureau June 26, 2002

NASHVILLE- A Senate committee rejected a new tax patch proposal on Tuesday, while a House panel approved a bill that could prompt a new court ruling on the constitutionality of an income tax.

Neither the House nor Senate, however, took any definitive steps toward resolving the tax and budget impasse that has brought the state within five days of a government shutdown.

That could change today as the Senate Finance Committee scheduled a vote on a revised Continuing Adequate Taxes and Services (CATS) proposal that contains a hodgepodge of temporary tax increases generating an estimated $771 million in new revenue.

House Speaker Jimmy Naifeh continued his long-running quest for support of a 4.5 percent state income tax that fell five votes short of passage last month.

About 30 members of the NAACP on Tuesday demonstrated for an income tax outside the state Capitol, more often the scene of anti-tax protests. Another demonstration of support for an income tax was scheduled for today while Nashville radio talk show hosts promised to summon anti-tax protesters if an income tax surfaces.

Prospects of an income tax may have suffered a setback when Rep. Shelby Rhinehart, D-Spencer, was hospitalized Tuesday after suffering a stroke.

Rhinehart has supported the Naifeh plan, as has Rep. Barbara Cooper, D-Memphis, who is recuperating from hip surgery. Rep. Keith Westmoreland, R-Kingsport, who died of a self-inflicted gunshot wound last week, also supported the Naifeh proposal.

Gov. Don Sundquist, an income tax advocate, said Tuesday he stands ready to support a short-term solution that would avert the government shutdown that would occur at midnight Sunday, the official end of the state's fiscal year.

"If they don't pass anything, it will be the greatest crisis for Tennessee since the war between the states," said Sundquist during a visit to the Legislative Plaza.

The Senate Finance Committee on Tuesday spurned a new "patch" proposal submitted by Sen. David Fowler, R-Signal Mountain, who had previously centered his efforts around a state constitutional convention on taxes.

His latest proposal, however, abandoned the convention idea and instead offered an array of miscellaneous tax increases.

Among them were a 2-cents-per-gallon increase in gasoline taxes and a new tax on motor vehicles. Motorcycles would be taxed annually at $15 each above current registration fees. Cars would be taxed at a rate ranging from $85 to $10, depending on age. The highest rate would be levied on cars less than 5 years old; the lowest on those more than 25 years old.

The package would have raised $933.7 million, some through taxes that are also part of the revised CATS plan. In general, the Fowler plan would have had less impact on business by targeting motorists.

When Fowler's plan came to a vote, only two members of the Senate Finance Committee Sens. Ben Atchley, R-Knoxville, and Douglas Henry, D-Nashville voted for it. Six senators voted no, and two abstained.

In the House Finance Committee, Rep. Frank Buck, D-Dowelltown, won on two noteworthy votes. The panel approved the CATS proposal, which he sponsored in the House, and the novel bill that could test constitutionality of a state income tax.

The CATS bill thus could come up for a House floor vote as early as today, though Buck said he might wait "another day or two." The Senate sponsor, Sen. Doug Jackson, D-Dickson, scheduled a vote on CATS in the Senate Finance Committee for today.

Income tax supporters have prodded Buck and Jackson to put CATS up for a prompt vote, in the apparent belief that the Naifeh plan will have a better chance if other proposals are killed first.

On the flip side of the strategy, labeled "last man standing" by some legislators, the CATS backers feel their chances will improve if an income tax is declared dead first and the alternative becomes major cuts in state government programs through a no-new-taxes budget.

Buck's other victory of the day came with approval of a bill seen as possibly leading to a state Supreme Court decision on the constitutionality of a state income tax. In 1932, the state Supreme Court declared such a levy would violate the state Constitution which has no specific provision on taxing personal income.

The Buck bill imposes a 1 percent tax on the first $30,000 in annual income of some licensed professionals or a maximum of $300 per year. The income tax would replace the present "professional privilege tax" that is paid at a flat rate of $200 per year by those covered, such as doctors, lawyers, accountants, engineers and architects.

"It's a cheap way to find out the constitutionality of some issues," said Buck, saying he expects "some lawyer who doesn't like the tax" to file a lawsuit challenging the new levy if it becomes law.

For the most part, those voting for Buck's "professional income tax" in committee have previously voted against the Naifeh plan. They included such East Tennesseans as Reps. H.E. Bittle, R-Knoxville; Jim Boyer, R-Corryton; and Bobby Wood, R-Chattanooga.

An exception was Rep. Joe Armstrong, D-Knoxville, who backed the Naifeh plan. He initially abstained from voting, but after the bill came up with an 11-11 tie switched his vote to "yes" so that it passed.

Those voting against the Buck bill were mostly income tax supporters, including House Finance Committee Chairman Matt Kisber, D-Jackson, and East Tennessee Reps. Ralph Cole, R-Elizabethton, and Ken Givens, D-Rogersville.

Tom Humphrey may be reached at 615-242-7782 or humphrey@edge.net

Sundquist preparing emergency funding plan

By BONNA de la CRUZ and ANNE PAINE Staff Writers

A business and sales tax plan by two middle Tennessee lawmakers advanced out of a state House committee yesterday, while Gov. Don Sundquist said he is assembling a ''state of emergency'' plan to keep government running in case legislators fail to approve a state budget by a midnight Sunday deadline.

The business and sales tax plan, described earlier as a ''middle ground'' between an income tax and deep spending cuts, appears to have little support in the Senate Finance Committee, which yesterday killed a separate but similar tax proposal by Sen. David Fowler, R-Signal Mountain.

Some Senate leaders said they expect to give House Speaker Jimmy Naifeh until tomorrow to try to pass a 4.5% flat-rate income tax that would generate $1.1 billion in six months of the first year and $2.5 billion the first full year.

State lawmakers are in the homestretch of another long legislative session dominated by taxes and the budget. They are short $877 million for the 2002-03 fiscal year to fund services at this year's level.

Among tax options remaining on the table are the income tax and the Continuing Adequate Taxes and Services plan, a business and sales tax plan co-sponsored by Rep. Frank Buck, D-Dowelltown, and Sen. Doug Jackson, D-Dickson.

The Jackson-Buck plan, which raises taxes on a variety of items, including cable television and cigarettes, moved out of the House Finance Committee on a voice vote yesterday but not necessarily because members liked it. Several voted yes only to allow the bill to go to the full House for debate.

As a backup plan, the House Finance Committee has put together a ''no-new-taxes'' budget that makes $939 million worth of cuts and transfers of funds from various pools of money, including more than $350 million from cities and counties.

Sundquist said yesterday he is working on a backup plan that would spell out how he would use emergency executive powers to keep essential state services, like prisons and the Highway Patrol, going for a short period of time, probably five to 10 days. That would buy lawmakers more time.

''We're facing the most serious problem since the War Between the States,'' Sundquist told reporters. He said he expects to discuss the emergency plan in more detail with legislative leaders at their weekly breakfast meeting today.

Without a budget in place, state employees would not be permitted to work starting July 1 because they would not have liability protection.

The Senate has approved a measure giving immunity to workers who ''volunteer'' to work, but Sundquist said they shouldn't count on enough prison guards and essential personnel.

Lawmakers would have to approve legislation giving Sundquist authority to spend money to provide essential services and keep essential employees on the job.

Sundquist said he remains optimistic lawmakers will resolve the budget dilemma by Friday and said he is talking individually to House members to help Naifeh pass a 4.5% income tax plan he is pushing.

Another backup plan, which has not been formally discussed, could include a penny increase in the state sales tax, increasing alcohol and cigarette taxes, and exempting the state from a White House business tax break that would have cost state coffers $50 million, said Sen. Ben Atchley, R-Knoxville.

Yesterday, Naifeh said he is looking for five or six more votes to get him to the 50 he needs in the House. The bill failed with 45 votes a month ago.

His strategy has been delayed with the death of income tax supporter Rep. Keith Westmoreland, R-Kingsport, last week and with two other supporters recovering from physical ailments.

Early yesterday, Rep. Shelby Rhinehart, D-Spencer, suffered a mild stroke and was rushed to the hospital. He was in stable condition in Vanderbilt University Medical Center's intensive care unit late yesterday, VUMC spokesman Jerry Jones said.

Also, Rep. Barbara Cooper, D-Memphis, is recuperating at home from hip replacement surgery and is waiting for a release from her physician to return to Nashville, Naifeh aides said.

Two years ago, several House members fell ill during the waning days of the legislative session under similar tax pressure.

As in years past, tax protesters are journeying to the Capitol most days lawmakers are in session.

Yesterday, a handful of income tax protesters lined Charlotte Avenue near the Capitol. Roger Cowell, a restaurateur from Fayetteville, said Naifeh's insistence on an income tax is like the Tennessee Titans playing season after season with only one play.

''I think Naifeh needs to realize he doesn't have the backing of the people,'' Cowell said. ''If he can't come up with anything other than another income tax — and it's taken him three years — I think he's the wrong person.''

Across the street, about 10 protesters from the NAACP held up signs and shouted slogans calling for ''tax reform.'' The group's fliers said it supported an income tax.

Earlier in the House Finance Committee, Buck, peppered with questions about the Jackson-Buck plan, painted it as a pure desperation measure. Jackson has not presented the proposal in the Senate Finance Committee yet.

It would raise about $766 million and includes an increase in taxes on alcohol, commercial trailers, vending machine sales and a bevy of business taxes.

''It looks like we've got no fewer than 12 tax increases in here,'' said Rep. Craig Fitzhugh, D-Ripley. ''There's not any measure of tax reform in here, is there?''

Buck acknowledged the bill was no thing of beauty.

''It's got warts all over it, but it's better than a no-new-taxes budget,'' Buck responded. ''We've got to do something to get the state of Tennessee out of this peril.''

Buck declined to get specific about where $100 million to $150 million in cuts would be made, whether local governments would lose money, and whether people would make fewer purchases with so many new taxes.

He said one possibility would be to shift $100 million generated by auto registration fees from the Department of Transportation's road fund to the Department of Safety.

He also argued that raising the cigarette tax 30 cents, to 43 cents per pack, would still keep it lower than the national average.

Marianne Bouldin, executive director of Campaign for a Healthy and Responsible Tennessee, which supports increasing the tax to decrease teen smoking, said the average is 52.5 cents per pack.

The Senate Finance Committee rejected on a 2-5 vote Fowler's $933 million tax proposal, which imposes an 8.75% sales tax statewide, raises cigarette and alcohol taxes, increases gasoline and diesel fuel taxes, and raises car tag fees. It also would decrease the sales tax on food to 5% and give a break on the sales tax on clothing.

''I don't agree with the taxes,'' said Sen. Jim Kyle, D-Memphis, who voted no. ''It would be the largest tax increase in the history of the state, and there's not enough economic growth in the structure to prevent us from having to raise taxes again in the near future.''

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