Taxes up millions under Bredesen

NASHVILLE — Gov. Phil Bredesen appears set to do what no Tennessee governor has done since former Gov. Buford Ellington stepped down in 1971: leave office without increasing the state’s sales tax.

But don’t think taxes have not gone up during the Democrat’s nearly seven years in office. They have through outright increases in areas such as cigarette taxes and closing off what the administration characterizes as business tax “loopholes.”

They add up to at least a half billion dollars, according to legislative and Revenue Department figures. The figure is bigger than the $405 million to $425 million a half cent sales tax increase would bring.

State Finance Commissioner Dave Goetz doesn’t dispute the figures, although he said “there is a difference between closing off a loophole and an actual increase.”

The administration has portrayed loopholes as gaps in the law or provisions that enable some businesses to avoid paying their share of taxes.

“I think if you went back and look at any administration, you’d find that to be true,” Mr. Goetz said. “There’s always little nips, tucks and dribs and drabs around to get done and different fees or increases.”

Ben Cunningham of Tennessee Tax Revolt, which often fights tax increases, said Gov. Bredesen “has been pushing the political envelope to increase taxes as much as he has.”

The public won’t stand for a general tax increase, he said.

Mr. Cunningham also argues that any analysis of tax increases under the Bredesen administration should include this year’s move by the General Assembly — at the urging of Gov. Bredesen — to increase unemployment taxes on business by $245 million to prevent the unemployment trust fund from going broke from increased jobless claims brought about by the recession.

That would bring total increases to about $764 million. A 1 percent sales tax increase would raise $810 million to $850 million annually, according to the Revenue Department.

Tennessee’s last governor, Republican Don Sundquist (1995-2003) pushed unsuccessfully in his second term for a tax-reform package that included a general state income tax, but it would have lowered a number of other taxes including the sales tax, the main source of state revenue.

Lawmakers balked, and the General Assembly in 2002 instead increased the state sales tax rate from 6 percent to 7 percent (except for food) as well as some business taxes. The increases generated about $1 billion in new revenue, much of which came pouring in under Gov. Bredesen.

Recession setback

But in the past year, the recession has pounded away at state revenues, resulting in a $1 billion year over year loss in the 2008-09 fiscal year that ended June 30.

Many of Gov. Bredesen’s increases have come about since his 2006 re-election to a second and final term, a time when his three most recent predecessors — Republican Lamar Alexander, Democrat Ned McWherter and Sundquist — either sought or went along with sales tax hikes.

In 2007, for example, Gov. Bredesen persuaded lawmakers to triple the state’s cigarette tax from 20 cents per pack to 62 cents per pack. Most funds went toward education. It is producing about $185 million to $200 million a year, according to Revenue Department estimates.

The governor this year, in addition to major spending cuts, successfully pressed lawmakers to increase taxes on HMO premiums from 2 percent to 5.5 percent. It is projected to raise an estimated $136.5 million. HMOs doing TennCare business were set to benefit because the money is being used to attract federal matching funds.

Mr. Goetz said that was to avoid further TennCare cuts and noted “that doesn’t buy you anything” in terms of program expansion. Lawmakers also approved the administration’s so-called “technical corrections” bill, which contains various loophole closures, cleanup of tax language and business tax breaks. The net effect of the measure was $57 million in additional revenue, according to Revenue Department spokeswoman Sophie Moery.

The bill partially did away with a tax “loophole” for certain family-owned businesses involved in commercial real estate. It is estimated to generate $25 million. Other provisions include the state’s taking over collection of business taxes from county clerks, a move expected to generate about $21 million through greater efficiency.

Such “technical corrections” measures have been a perennial favorite of the administration and the target of critics. Ms. Moery said the cumulative effect of technical corrections bills over the years was $125 million. The money is raised “through the closing of loopholes and clarification of tax laws. The bill is widely supported by the General Assembly, passing by a wide margin of votes every year,” Ms. Moery said.

With regard to the increase in unemployment taxes, some business associations reluctantly backed the move, noting that it would cost the state and ultimately businesses even more if the federal government had to pump up the fund. The legislation includes triggers to bring rates down automatically if future conditions warrant. Still, Mr. Cunningham said, “that’s a tax increase.

Structural problems?

Bill Howell of Tennesseans for Fair Taxation, which advocates for tax reform measures including a state income tax, said Gov. Bredesen has been “somewhat” creative in getting new revenues.” But he believes the governor has avoided the main issue.

“I think they’ve been nibbling around the edge,” Mr. Howell said. “They haven’t addressed the structural problems. They’ve been patching up little leaks, little holes in the dike. But there’s a big breach they haven’t addressed.”

The big breach, he said, is “the lack of a broad-based income tax.”

Tennessee’s sales tax lags behind economic growth over time, Mr. Howell said, and numerous sales tax exemptions make the situation worse.

Mr. Howell said Tennessee’s sales tax, which he said hits lower-income residents disproportionately, is at its limit with the 7 percent state levy and with locals able to add up to 2.75 more.

“We’re really up against what I think is a really significant barrier which is 10 percent,” he said. “I think there’s going to be huge resistance to raising sales taxes over 10 percent.”

As the battle to succeed Gov. Bredesen gets under way, most candidates are avoiding talk about tax increases. Two Democrats who supported the Sundquist income tax — state Senate Minority Leader Jim Kyle, D-Memphis, and former state House Majority Leader Kim McMillan, D-Clarksville — have repudiated their previous stances.

“That was almost 10 years ago,” Sen. Kyle told the Memphis Commercial Appeal in advance of his official gubernatorial announcement last week. “I am against an income tax, and I will veto it. Phil Bredesen has proven we can manage this government without an income tax and frankly showed me I was wrong to consider an income tax.”

Other candidates such as U.S. Rep. Zach Wamp, R-Tenn., have said they will they oppose a state income tax and sales tax increases.

“It includes absolutely no income tax and no increase in Tennesseans’ taxes,” the Chattanooga congressman said of his pledge. “If it was closing a loophole that made absolutely no sense whatsoever, I wouldn’t consider that a tax increase. But I think we absolutely do not need to raise the tax obligation of Tennesseans during an economic time such as this.”

He said candidates “need to be honest ... that we’re going to have to live within our means and pursue the most austere, limited government approach in the next administration.” But he said he remains “pretty upbeat” that as governor enough jobs will be created so “we can grow the economy and continue to make investments even beyond what we have today.”

Mr. Goetz said tax revenues won’t bounce back on their own accord. The next governor will find it hard to begin new initiatives, he said.

“You would have to stop doing a lot of things in order to be able to find the funds to do new things because the growth is not significant,” Mr. Goetz said.