TN TAX BATTLE: More battles inevitable, but is income tax?

By Richard Locker locker@gomemphis.com July 7, 2002 NASHVILLE - The monumental political battle over state tax reform ended after 3 years Wednesday when income tax advocates conceded defeat.

Hours later the General Assembly approved a 17 percent increase in the state sales tax - from 6 percent to 7 percent - that opponents said made Tennessee's tax system even more regressive than it was. And although tax reform advocates admit they lost the battle, they say they are not surrendering. Even conservative Republican Sen. David Fowler of Chattanooga, an income tax opponent, told the Senate Finance Committee last month that an income tax is "inevitable."

The battle took Tennessee closer to a general income tax than it has been in 70 years.

However close it came, the political reality now is that comprehensive tax reform is a dead issue for at least the next four years, for several reasons:

The legislature is losing a large number of income tax proponents. Of the 45 House members who voted for an income tax May 22, one has since died and seven are not running for re-election. Some are likely to be replaced by candidates "taking the pledge" against an income tax in their campaigns. It takes 50 votes for House approval.

In the 33-member Senate, where every vote is crucial in building the 17 required for passage, Republican Sen. Gene Elsea of Spring City, co-sponsor of an income tax bill, is retiring.

More significant was Friday's stunning announcement by Sen. Robert Rochelle (D-Lebanon) that he is suspending his re-election campaign to re-evaluate his future. Rochelle was the Senate's leading tax reform advocate.

Both of the perceived front-runners in the gubernatorial race are campaigning on anti-income-tax pledges. No such sweeping change can win legislative approval without the governor's backing.

And the $933 million tax plan that won approval Wednesday - ending the budget stalemate and reopening government offices shuttered for four days - will carry the state financially for two to four years, deferring the urgency for tax changes that fueled the debate since 1999.

As a result of those factors, whenever tax reform proponents speak of trying again, they're not talking about next year. "Tax reform is inevitable, but the immediate future is somewhat bleak because there's enough money for 18 months and the governor candidates are taking the pledge," Rochelle said. "But sometime the accident of timing will give us enough senators and representatives who will break this habit of preying on the poor" with high sales taxes.

Rep. Tommy Head (D-Clarksville) said he would propose trying to pass tax reform at a time when the state is not in a financial crisis, so that the new system is designed to raise the same amount of revenue - instead of the additional $1.2 billion sought this year. "If it's revenue-neutral so that people understand we're changing the system and not just raising taxes, I think it'd be different," Head said.

Sen. Jim Kyle (D-Memphis) said if the new governor is unable to meet his campaign pledge to "manage" the state out of its financial problems by the time the new revenue approved Wednesday begins faltering, "the message may get across" to the public, because both Democrat Phil Bredesen and Republican Van Hilleary have made those positions such basic themes of their candidacies.

In the House, Speaker Jimmy Naifeh said Thursday that although he won't give up his fight for tax reform, he isn't sure when it will be rejoined. Naifeh (D-Covington) advocated a flat-rate 4.5 percent income tax coupled with removing all sales tax from grocery food, clothing and nonprescription drugs. His plan became the focus of the debate.

"I don't know when we will revisit tax reform again in Tennessee. I plan to be in the speaker's chair and I plan to seek it," he said.

"It's going to be extremely hard. We're going to lose eight solid votes. I don't know when anyone will try it again. We'll count votes on it next year. People are going to feel it (the sales tax increase) when they go to the grocery stores and clothing stores. I think it will have an effect."

Sen. Steve Cohen (D-Memphis) said the pledges made in the governor's race will foreclose tax reform for the next four years. "The earliest I could possibly see it return is 2007, and I'm not sure then.

"If Hilleary wins, with the present tax structure we'll be so far down in 2006 compared to other states - we'll be challenging Puerto Rico - it will give a Democrat an issue to run on in 2006. Or if Bredesen wins, maybe there could be a constitutional convention call in 2004, a convention in 2006 and if the convention proposes a tax system with a guaranteed cap on taxes and guaranteed tax relief with the people approving it, there could be a chance."

"Absolutely the fight will continue," said Linda McCarty, director of the Tennessee State Employees Association. The tax plan approved Wednesday "is just another patch and it's a patch on the backs of the working families of the state."

According to a national report distributed in the Senate last week, Tennessee ranked fifth-worst among the states in the regressivity of its tax structure even before the change. That's because the state taxes 12.3 percent of the income of the poorest 20 percent of its people, according to the report, while the top 1 percent in income pay the equivalent of 3.6 percent of their income in taxes.

In 30 Tennessee counties, the combined state and local sales tax burden will be 9.75 percent, among the nation's highest. In Shelby County, where the local tax is 2.25 percent, the combined total will be 9.25 percent.

And although the sales tax increase will not apply to grocery food, Tennessee remains one of 12 states that still tax food.

"It's definitely not over," said Dick Williams of Nashville, a board member of Tennesseans for Fair Taxation. "If not next year, the following year the (revenue) adequacy issue will be back."

In the meantime, the legislature next year will be the first since 1998 not dominated by tax and budget issues. The long fight was perhaps the state's biggest sustained legislative struggle since Tennessee's ratification in 1920 pushed the women's suffrage amendment to the Constitution over the top.

With the pressure off, lawmakers could begin to enact some of the program and spending reforms identified by the House Finance Committee's exhaustive review of the budget this year, bolstering the case for tax reform.

Ultimately, of course, the structure of Tennessee's tax system depends on the people of Tennessee: the balancing of their ambitions for the kind of state they want to live in against their immediate self-interest, several legislators said.

"Whoever is here two to three years from now will be going through the same problem, and unless you get a majority of legislators who are more interested in Tennessee than in getting re-elected, you'll come to the same conclusion," said Sen. Jerry Cooper (D-Mc Minnville).

Shutdown could shadow election

Ghost of Legislature's taxing conflict may haunt the halls of politics

By Tom Humphrey, News-Sentinel Nashville bureau July 7, 2002

NASHVILLE - While the Legislature arguably restored state government to fiscal status quo with a $933 million tax measure, the political landscape may be in for further upheaval as a result.

The General Assembly's vote to give Tennessee one of the highest sales tax rates in the nation - up to 9.75 percent when state and local levies are combined - appears likely to have considerable influence on the campaigns for governor and legislative seats. It could bring challenges within the Legislature to the leadership of House Speaker Jimmy Naifeh and Lt. Gov. John Wilder, who presides over the Senate.

The infusion of new revenue means the state will have enough money for basic services without any further tax increase for two or three years, according to state Comptroller John Morgan. Assuming, that is, that the economy is stable.

It also assumes no new programs with a substantial price will be launched, which could leave the state behind its neighbors in spending on areas ranging from education to home-based care for the elderly. Advocates for such causes lamented this and promise to step up their efforts in the future.

Retail merchants, especially in border counties, fear the sale tax increase will drive business to other states or to the Internet. Dr. William Fox, head of the University of Tennessee Center for Business and Economic Research, has estimated that a percentage-point increase in the sales tax translates into about $1 billion in lost sales for Tennessee merchants.

Still, the reaction to the Legislature's tax vote in many quarters could be summarized in a simple sentence: "It could have been worse."

That refrain echoed from state workers, teachers, university students and others terrified by the prospect of a complete government collapse on the heels of a partial shutdown. It was mouthed by lobbyists for various special interests that could have been hit harder by alternative tax increases under discussion.

Perhaps most of all, that opinion was repeated by opponents of a state income tax, including many legislators.

"It was the best option available to keep our government serving our constituents and it wasn't an income tax," said state Rep. Beth Harwell of Nashville, who is also chairman of the Tennessee Republican Party.

Combining votes of senators and representatives, Republicans voted 44-14 for the largest tax increase in Tennessee history. Twenty-eight Democrats voted for it, while 37 were opposed.

Proponents of tax reform based on an income tax also joined the could-have-been-worse chorus. They included Naifeh and Gov. Don Sundquist, two of the state's most prominent tax reform advocates. Naifeh voted for the final package while Sundquist lobbied in support of it, both after effectively pronouncing the income tax dead.

Curiously, most advocates of an income tax say the effort is probably dead for the foreseeable future while opponents see it as still on the table.

"I think the entire situation made it clear that the income tax is not going away," said Frank Cagle, communications director for Republican Van Hilleary's gubernatorial campaign. "It's obvious you're going to have to elect somebody who's committed to reducing spending, reforming TennCare and against an income tax."

Hilleary, apparent front-runner for the Republican nomination, has made opposition to the income tax a centerpiece of his campaign. Democratic front-runner Phil Bredesen also repeatedly declared his opposition, though perhaps with less ardor.

Dave Cooley, senior strategist for Bredesen's campaign, said the vote opens the governor's race to discussion of other issues while the new revenue "gives the new governor a chance to make a great difference if he has management skills and experience."

Other Democrats contend that the new lay of the political land benefits their party generally.

"I think people realize the income tax is dead now, and that takes it away as an issue," said Sen. Steve Cohen, D-Memphis, who supported an income tax.

Though the issue has crossed party lines, Democrats in the Legislature have generally been more likely to support an income tax. Now that it's dead and a Republican-supported sales tax increase is in place, backing the new levy could become the focus of more voter resentment, according to the theory.

Cohen, a leading crusader for a state lottery, also contends that the new situation enhances prospects for a lottery being approved in November.

A Tennessee lottery, he says, would lessen the sales tax "leakage" to other states. As things stand now, he says, Tennesseans drive to other states to get lottery tickets and while there, they buy items they would otherwise have purchased in Tennessee. If the lottery buffs buy tickets at home, they are less likely to spend time and gas money going to states with lower sales taxes, he says.

Voters will provide some answers on the political impact of the tax situation in the Aug. 1 primary elections and considerably more in November.

One of Bredesen's primary opponents, Knox County District Attorney General Randy Nichols, openly supports an income tax while another, former state Education Commissioner Charles Smith, will not rule it out.

Jim Henry, former state House Republican leader and Hilleary's leading opponent, opposes an income tax but has repeatedly denounced Hilleary for contending the state has no fiscal problem.

Both Bredesen and Hilleary have downplayed the state's fiscal problems generally. The new revenue may make their contentions, ridiculed as ludicrous by primary opponents, seem more accurate and solidify their front-runner status.

Fourteen legislators are not seeking re-election to the seats they now hold and another, Rep. Keith Westmoreland, R-Kingsport, recently killed himself. That means at least 15 freshmen, 13 in the House and two in the Senate, in the 103rd General Assembly; more if any incumbents are upset.

And many incumbent legislators face serious competition, though there are only a handful of such contests in the Aug. 1 primaries.

Among the incumbents with serious opposition in primaries are Sens. Tommy Haun, R-Greeneville; Randy McNally, R-Oak Ridge; Jeff Miller, R-Cleveland; and Douglas Henry, D-Nashville; and Reps. John White, D-Lawrenceburg; Paul Phelan, D-Trenton; Zane Whitson, R-Unicoi; Ralph Cole, R-Elizabethton; Jamie Hagood, R-Knoxville; and Joe Kent, R-Memphis.

Of those, the income tax is an issue in the case of Haun, McNally, Henry, White, Phelan and Cole. White, Phelan and Cole voted for it this year, while opponents characterized Haun and McNally as income tax supporters. Henry, on the other hand, is attacked by his opponent for not supporting an income tax.

November is likely to see several races with the income tax as an issue, but one notable confrontation may not occur after all. Senate Speaker Pro Tempore Bob Rochelle, D-Lebanon, a leading income tax advocate, announced Friday he is suspending his campaign and considering dropping out of the race after his wife received "another violent, threatening phone call."

He also declared his disappointment in the Legislature's vote to raise the sales tax.

"All Tennesseans are going to feel the crush of this increased tax," he said. "As these working families learn to deal with the stress of having to make ends meet while others get away without paying their fair share, my family is learning to cope with the stress of having people threaten my wife and my children."

Rochelle is unopposed in the Democratic primary and Rep. Mae Beavers, R-Mount Juliet, has no opposition for the GOP nomination to face him in November. Rochelle has characterized her as a "do-nothing" because she has voted against all tax increases.

The long-running stalemate over the budget and taxes has apparently lowered public esteem for legislators. One recent poll indicated less than 10 percent of Tennesseans think the Legislature deserves a favorable rating.

If that held true, it could enhance prospects for incumbent defeats. But legislators argue that the resolution of the budget crisis, coupled with the traditional phenomenon of people liking their legislator while disliking the institution, should eliminate any major anti-incumbent sweep.

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

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