Tennessee shoppers won’t get another sales-tax holiday next spring as state officials try to cope with the biggest drop in sales-tax collections in a half century.
Gov. Phil Bredesen said Tuesday he must budget with less state money this year after sales tax holidays last August and in April cost the state as much as $20 million in an already-tough budget year. April’s sales tax collections were the lowest in 47 years, state officials said.
“I thought it was a good idea at the time,” Gov. Bredesen said of his decision in 2005 to push for weekend exemptions on the sales taxes paid for selected clothing and school items. “I pushed for it and got it into law. I’m having to live with the consequences of it right now.”
The governor said the next back-to-school tax holiday still is set for the first weekend in August, even though he is pushing to cut $468 million in next year’s budget because of a shortfall in tax collections.
During a meeting with reporters and editors of the Chattanooga Times Free Press, Gov. Bredesen said he “didn’t want to tie the Legislature up in knots” at the end of its session by trying to scrap the Aug. 2-3 holiday on sales taxes paid on clothing and school items.
“There certainly won’t be another sales tax holiday in the spring,” Gov. Bredesen said.
The governor said tax losses from sales tax holidays are a tiny share of the state’s $28 billion annual budget, but he acknowledged that he couldn’t identify any economists who support such temporary tax holidays.
Despite the shortfall in sales tax revenues this year, Gov. Bredesen said he is not going to push for any major reform of Tennessee’s sales-dependent tax structure.
By the numbers
* $10 million: Estimated savings for consumers, and cost to the state, for each weekend sales tax holiday
* $45 million: Estimated savings for consumers, and cost to the state, from the half-cent drop in Tennessee’s sales tax on food, effective Jan. 1, 2008
* $49.8 million: April shortfall in sales tax collections, which were down 4.08 percent from a year ago.
* $468 million: Minimum projected budget shortfall for fiscal year that starts July 1
Sources: Tennessee Department of Revenue, Tennessee governor’s office, Center for Business and Economic Research
According to a recent study by the Rockefeller Institute of Government, a public policy research agency at the State University of New York, tax collections in the Volunteer State are down more than in most other states because Tennessee derives most of its state budget from its sales tax and doesn’t tax personal income.
Although personal income has continued to grow, consumer spending and sales tax collections in Tennessee are down in 2008 and plunged in April by the biggest amount since 1961, according to the state Department of Revenue.
But in the last 20 months of his term, Gov. Bredesen said he wants to focus on how money is spent, not on how it is collected. He has proposed “technical corrections” to bring in more than $20 million of extra excise taxes, but he insisted the measure is similar to yearly changes recommended to close tax loopholes.
“There’s not a perfect tax system, but I’m more inclined to take the tax system we have and spend our time and energy trying to figure out how best to spend the money we have coming in to best advance the interests of the public,” the governor said.
The current economic slowdown justifies his opposition last year to the half-cent cut in the sales tax on food, Gov. Bredesen said, which began in January and is projected to save consumers — and cost state government — $45 million.
“I was very critical of that reduction as unwarranted, and I think that has proven to be very true this year,” he said.
But advocates for cutting Tennessee’s sales tax on food note that the state still has the third-highest sales tax on food in the country and could eliminate the tax altogether by adopting either a state income tax or a “combined reporting” tax system to limit how multistate corporations shift profits and taxes among states.
Tennesseans for Fair Taxation, a statewide group that pushed the Legislature last year to cut the state tax on food by a half-cent, also urged Gov. Bredesen this week to tap the state’s record-high $750 million Rainy Day Fund to help ease budget cuts and keep taxes down on food.
“If we cannot use the Rainy Day Fund when the governor is threatening to cut vital public investments and laying off thousands of state employees, then we should consider renaming it as the ‘40 days and 40 nights’ fund,” said Dave McIlwaine, chairman of Tennesseans for Fair Taxation.
Gov. Bredesen backed off his earlier plans to add $35 million to the Rainy Day Fund next year. But he said it is critical not to tap the fund now “because you can’t use one-time dollars to fund ongoing expenses.”
