published Tuesday, December 28th, 2010

Bredesen tax legacy may be tough act to follow

Taxes and fees

Here are some of the major permanent and temporary taxes and fees passed during Gov. Phil Bredesen's eight-year tenure:

Various changes in business franchise and excise tax laws (2004) -- $10.2 million annually.

Made various "technical corrections" to tax laws, eliminates business tax loophole (2005) -- $15 million to $20 million annually.

Made various "technical corrections, closed off "loophole" for real estate investment trusts (2006) -- $15 million to $20 million annually.

Cigarette tax (2007) -- $160 million to $180 million annually.

Made various "technical corrections" (2007) -- $4.77 million annually.

Made various "technical corrections." Multiple changes to business taxes (2008) -- $13.95 million annually.

Increased tax on certain managed care companies, hiked environmental permit fees (2009) -- $136.6 million annually.

Raised employer taxes to keep Unemployment Trust Fund solvent (2009) -- Raises $245 million annually until fund balance, now under recession-related pressures, exceeds $650 million.

Enacted Annual Coverage Assessment Act (2010) -- Imposes 3.25 "assessment" on non-government hospitals gross revenues; raises estimated $310 million with most of the money used to draw additional federal Medicaid matching funds.

Sources: General Assembly Fiscal Review Committee; Department of Revenue, interviews, Times Free Press news accounts

NASHVILLE -- Departing Gov. Phil Bredesen says his successor can run state government without a sales tax hike, but the record shows that, while Bredesen didn't raise the sales levy, other taxes and fees soared close to $1 billion on his watch.

Acting at Bredesen's behest in 2007, for example, lawmakers passed a cigarette tax hike expected to bring in $160 million to $180 million a year, most of it going toward education.

Earlier this year, faced with Bredesen's threats to slash their TennCare payments, hospitals asked lawmakers to pass a one-year hospital "assessment fee" that would raise $310 million to draw down additional federal matching funds.

Other increases included a 2009 package that increased taxes on managed care companies not participating in TennCare. The package, which also raised environmental permit fees, brings in about $136 million annually.

The same year, Bredesen persuaded lawmakers to boost employer taxes by an estimated $245 million a year to prevent the state's Unemployment Trust Fund from going broke. The tax is slated to go away when the fund hits $650 million in reserves.

A list of tax and fee measures compiled by the General Assembly's Fiscal Review Committee staff, combined with Revenue Department figures and news accounts, shows total increases in Bredesen's tenure exceeded $900 million, although some tax and fee hikes are, theoretically, only temporary.

"Tennessee is a state that relies on a sales tax for its revenue base, and to an extent we needed to close loopholes to protect that base," Bredesen spokeswoman Lydia Lenker said in an e-mail.

Taxes had to be raised in such areas as tobacco, she said, "but throughout his administration, the governor avoided enacting any broad-based taxes."

ending "loopholes"

During Bredesen's tenure, the administration each year pitched a "technical corrections" bill that included measures aimed at shutting down what officials called "loopholes." They also included flat-out tax hikes, and some lawmakers complained about the process.

State Senate Finance Committee Chairman Randy McNally, R-Oak Ridge, said the annual "technical corrections" legislation brought each year by Bredesen "in some ways closed some loopholes and in other regards it was, you know, I guess you could call it tax increases, fee increases."

McNally noted that the Legislature cut the state sales tax on food from 6 percent to 5.5 percent.

Lt. Gov. Ron Ramsey, R-Blountville, the Senate speaker, said Democrat Bredesen relied on any number of revenue measures during his eight years in office.

"He raised the cigarette tax, and it passed [the Senate] on a straight-line party vote," Ramsey recalled. "He made an attempt to raise taxes on small businesses last [session] by removing the single-article [sales tax] cap."

Bredesen suggested elim- inating the sales-tax cap on major purchases exceeding $3,200. Lawmakers blocked the $85 million measure as well as Bredesen's proposed $21 million increase in driver's license fees. Both measures were designed to help offset the need to whack government spending in light of recession-ravaged revenues.

In general, each penny of the state's 7 percent sales tax raises about $900 million in revenue annually.

Appearing with Republican Gov.-elect Bill Haslam after the Nov. 2 election, Bredesen told reporters "I really do" think Haslam can avoid a major tax increase.

"When I came into office, it was almost an article of faith with a lot of people that you had to have sales tax increases every eight years or something like that," Bredesen said.

But "I really feel like we demonstrated that ... if you're willing to be circumspect about the kinds of services you offer and [be] realistic about them and so on, I really think you can" avoid that, he said.

tax battle

Bredesen came into office in 2003 following a years-long battle over whether to implement a general state income tax in Tennessee. His predecessor, Republican Gov. Don Sundquist, supported the income tax, but efforts to pass it failed. Lawmakers instead passed a one-penny state sales-tax hike.

Bredesen reaped the benefits of the tax hike when he became governor, but he said he still had to manage a $500 million shortfall in his first-year budget. That was largely because of unexpected increases in TennCare.

Ben Cunningham, an anti-tax activist influential in conservative political circles, said he "certainly wouldn't call Bredesen a fiscal conservative" on taxes.

"I call him a pragmatist. He did what was politically feasible," Cunningham said.

After Bredesen's first year, tax revenues hummed along until the recession struck late in 2007. State revenues plummeted but the state reaped about $1.7 billion in federal stimulus money over two years.

The state has cut about $1.1 billion from its budget over the past two years, but stimulus funds meant most of the effects are delayed until July 1, nearly six months after Bredesen leaves office.

change urged

Bredesen's luck over eight years amazed Bill Howe of Tennesseans for Fair Taxation.

"I don't know a metaphor that's good enough to fit that situation," he said.

But Howe, whose group backs tax reforms including an income tax, said, "Now the roosters are coming home to roost" for Haslam.

While running for governor, Haslam promised not to raise sales taxes and opposed a state income tax.

In a survey conducted by the Tennessee Newspaper Network, a consortium of major state newspapers including the Chattanooga Times Free Press, Haslam said he would work to shut down tax loopholes but "not use this as a backdoor means of raising taxes."

He steered clear of an outright no-new-taxes pledge, calling taxes "job killers" and noting he is "committed to getting our state through its current budget challenges by prioritizing, cutting and restructuring state government."

Sen. Andy Berke, D-Chattanooga, said he agreed with Bredesen's opposition to raising the state sales tax because the levy, which can hit 9.75 percent when combined with local sales taxes, is high enough.

"The sales tax hurts our businesses by encouraging people to shop in other states, and it hurts our citizens by making them pay more for their purchases," Berke said. "I think it hurts places like Chattanooga and South Pittsburg [in Marion County] especially because we have so many options across the border."

Ramsey credits Bredesen with "pretty slick political maneuvering" on the $310 million hospital "assessment fee." Hospitals last session successfully urged lawmakers to enact the one-year fee after Bredesen threatened to slash their TennCare reimbursements.

"He boxed them into a corner by cuts, knowing that option was on the table and it was good political savvy for himself not to have to propose that," Ramsey said of Bredesen. "Yet, at the same time he gave the hospitals a wink and a nod, in my opinion."

Tennessee Hospital Association President Craig Becker said the planned cuts were real in his group's view.

"One thing we learned with this governor was that when he's going to do something, he does," Becker said.

The assessment may be extended if hospitals agree, he said.

Contact staff writer Andy Sher at asher@timesfreepress.com or 615-255-0550.

about Andy Sher...

Andy Sher is a Nashville-based staff writer covering Tennessee state government and politics for the Times Free Press. A Washington correspondent from 1999-2005 for the Times Free Press, Andy previously headed up state Capitol coverage for The Chattanooga Times, worked as a state Capitol reporter for The Nashville Banner and was a contributor to The Tennessee Journal, among other publications. Andy worked for 17 years at The Chattanooga Times covering police, health care, county government, ...

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