NASHVILLE - Raising Tennessee's estate tax exemption by $500,000 would cost the state about $23 million in lost revenues, according to projections by Gov. Bill Haslam's administration.
The inheritance tax now applies to estates worth more than $1 million, and was paid in 845 instances in the last budget year.
Haslam has said he agrees with fellow Republicans in the Legislature who want to chip away at the estate tax because it "chases capital away" by discouraging retirees from living in Tennessee.
But the governor warned that the state's finances aren't strong enough to afford reductions in either the estate tax or the Hall tax on interest and dividends.
"In this difficult time we still have expenses that are larger than our revenues at this point, so it's hard to figure out how we would do that, because we have to make that budget balanced," he said.
Republicans in the Legislature are nevertheless pressing to reduce one or both of the taxes as they gear up for their re-election campaigns.
"We are well aware of the governor's concern - and they're legitimate concerns - that we are still strapped economically in this state," said House Speaker Beth Harwell, R-Nashville.
Harwell said there's still an opportunity to phase out the inheritance tax "in a responsible manner."
The state Revenue Department's projections indicate that 381 taxpayers would be covered by moving the estate tax exemption to $1.5 million.
"People say just sort of inch into it," Haslam said. "Well, the first step is a big one, and we'd have to figure out how to make this work."
Boosting the exemption to $5 million, the equivalent of the federal level, would cost the state $55 million in revenues, according to the projections.
The heads of five anti-tax organizations, including Grover Norquist of Americans for Tax Reform and Justin Owen of the Nashville-based Beacon Center, sent a letter to Haslam earlier this month raising concerns about his "reluctance to usher through repeal of the Tennessee Inheritance Tax in 2012."
"The conditions for repeal will never be as favorable as now," according to the letter.
Senate Speaker Ron Ramsey, R-Blountville, said the high price tag of cutting the estate tax has him instead targeting a cut in the Hall tax on income from stocks and bonds.
Lawmakers took a first step in reducing the Hall tax last session by expanding a tax exemption to seniors earning less than $26,200 a year. The move is projected to cost about $1.75 million in state and local revenues.
Ramsey said it is "very likely" that lawmakers will cut the Hall tax more in the upcoming session, with a goal of eventually phasing out the tax for seniors. But Harwell said she's hesitant about cutting the Hall tax more, because about a third of the money is sent back to the governments of the counties and cities where those who paid the tax live.
"That's a legitimate reason why we are not moving forward quickly on reducing the Hall income tax, because our local governments do rely on that," she said.
House Democratic Caucus Chairman Mike Turner, of Nashville, said his fellow Democrats won't stand in the way of tax cut proposals if Republicans bring them to a vote.
"They're talking a lot of rhetoric, cutting all these different taxes that the state can't really afford," he said. "They want us to stop it. But if they want to play these silly games, we'll help them pass it."
Not part of the discussion among the Republican majority is a cut in the sales tax on groceries, last reduced from 6 percent to 5.5 percent in 2007. Ramsey said he has regretted agreeing to the $41 million cut on the food tax.
"I think it's more psychological than it is anything else," he said. "We're never going to do away with it completely, so I don't think lowering it really does help that much."
Ramsey said he advocated in 2007 to instead use the money to pay for a sizable reduction in the estate tax, but his fellow Republicans in the Senate overruled him.
Turner said Democrats disagree with that approach.
"The sales tax weighs heavily on the poor of the state, and it's regressive," he said. "That's where we need to find tax relief."