NASHVILLE -- It's been 12 years since Tennessee last hiked its sales tax, and Republican Gov. Bill Haslam says he intends to extend the streak four more years in his second term that starts Jan. 17.
"You'll never hear me proposing raising the sales tax," Haslam said last week during a Times Free Press interview in his state Capitol office.
With a state tax of 7 percent and up to 2.75 percent more tacked on at the county level, Tennessee has among the highest sales taxes in the nation.
Raising it higher could put Tennessee at a competitive disadvantage with other states, he said.
But, Haslam acknowledged, not increasing the tax will keep pressure on his administration and the Republican-led Legislature to continue making cuts that some fear have already gone too far.
While not conceding excessive program cuts, Haslam said, "we haven't suspended any law of economics here."
"If we have the biggest items in our budget increase faster than revenue increases -- that basically being health care and education, which is where we spend most of our money ... you've got a problem."
Still, the governor said, "our answer has been to continuously find ways to shave state government, which we have done fairly effectively. Every year state departments have probably been cut in the 2 or 3 percent range, which is harder than it sounds.
"I think that's going to continue for the foreseeable future. ... And then we're basically, obviously, hoping the economy continues to grow here."
Even with the high rate, in a state with no general income tax -- and where voters in November approved a constitutional amendment specifically banning one -- Tennesseans are consistently ranked as having among the lowest overall tax burden in the nation.
Critics attack the sales tax as falling disproportionately on the poor and moderate-income Tennesseans. And they also note the loophole-ridden levy fails to keep up with costs and population growth and prevents adequate investments in key areas like education.
Conservatives like it because everyone pays something and it helps keeps government services in check.
The sales tax was last raised in 2002 in the midst of a several-year struggle by Republican Gov. Don Sundquist to get an income tax through the then-Democratic run Legislature. The one-penny sales tax hike brought in an estimated $1 billion in new revenue.
Democratic Gov. Phil Bredesen reaped the benefit. Bredesen, who also pushed through a major increase in cigarette taxes, left office in January 2011 without having sought a sales tax increase.
How much to cut?
Republican Senate Speaker Ron Ramsey recently applauded Haslam's approach to trimming state spending in various areas as he makes room for other priorities. But he noted it's not always easy with new revenue running only in the $300 million to $400 million range.
"By the time you fund [K-12 education] and just a few other natural growth [items] that's gone," Ramsey said earlier this month. "If you're going to do any kind of improvements whatsoever, any changes, you have to look at cuts."
The State Funding Board projects just $300 million in revenue growth for the fiscal year 2015-2016 budget that Haslam will submit to lawmakers early next year.
The sales tax accounts for 53 percent of revenues in the current budget of $32.4 billion, which includes state and federal revenue as well as higher education tuition and other funds. The $10.12 billion general fund, which pays for most state operations, relies heavily on the sales tax.
As he has every year since taking office, Haslam has asked state agency heads to present him with budget reduction recommendations for FY 2016. This time the reduction target is 7 percent. The governor said that's not likely to occur in all cases, but it gives him a chance to sort through their priorities and make choices.
"I admire him for that," Ramsey said. "That ought to be something you do every year, even in good times, is to look at cuts to see if you're doing something you shouldn't be doing."
House Minority Leader Craig Fitzhugh, D-Ripley, said that while the state needs more revenue, "we certainly can't stand another sales tax increase."
"He [Haslam] is right there," Fitzhugh said. "We probably can do a better job of collecting sales tax owed to us. Mainly, I'm talking about Internet sales."
Tennessee and other states are losing out on hundreds of millions of dollars from Internet retail sales taxes because of U.S. Supreme Court decisions saying states can't compel Internet retailers to collect the levies. The issue has simmered for years in Congress with no definitive action taken.
But, Fitzhugh said, "on the other hand I just don't see how we can continue cutting and cutting and cutting."
The state has cut its budget again and again, starting with the 2008 Great Recession. Bredesen started reducing budgeted employee positions and Haslam has continued the practice. From FY 2010 to the current FY 2015, the number of full-time general government positions shrank by 8 percent, going from 44,897 to 41,275, according to state budget documents.
State government is getting "awfully lean," Fitzhugh said. "Corrections and the Department of Children's Services are getting where we can't provide the basic services."
Dick Williams, chairman of Tennesseans for Fair Taxation, which had advocated for a state income tax, said the current trajectory "is just not sustainable."
"They've been cutting spending. Obviously you can find little things here and there that need to be done differently," Williams said. "You can consolidate stuff, shift offices around. But there's a limit to that. Everything else is going up to some extent."
Haslam has opened the door to increases in state gas taxes, increases he says are necessary to maintain the state's transportation infrastructure.
Fending off tax cuts
After agreeing in his first term to eliminate the state's inheritance and gift taxes as well as cutting the sales tax on food by a quarter cent, to 5 percent, Haslam is coming under pressure to eliminate the state's Hall income tax.
The levy applies to unearned income on stock dividends and bond interest. Haslam resisted attempts to phase it out in the 2014 legislative session. But several lawmakers and other proponents, including the Tennessee chapter of Americans for Prosperity, vow to come back in 2015.
Haslam has already challenged them to state where they would cut spending to make up the difference.
"It [sales tax reliance] definitely leaves you limited options," Haslam said during the interview. "It's one of the reasons I've been concerned when people have proposed cutting other taxes. It's one of the reasons I've expressed that we need to think long and hard about that. Because we do have a very narrow revenue base in Tennessee."
Contact staff writer Andy Sher at email@example.com or 615-255-0550.