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Inside the Tennessee Welcome Center on Interstate 75, Gov. Bill Haslam speaks recently about possible solutions for the Interstate 75/I-24 junction project. Hamilton County Mayor Jim Coppinger, center, and Tennessee Department of Transportation Commissioner John Schroer listen.

NASHVILLE — Republican Gov. Bill Haslam opens public hearings today on his administration's upcoming budget, though Tennessee's rebounding revenues have administration officials seeking to dampen state lawmakers' expectations.

A major part of the annual revenue game was resolved last week when the State Funding Board lowballed projected revenue growth for the last half of this fiscal year as well as in the FY 2017 spending plan that will come before the General Assembly early next year. The board ignored more optimistic projections by University of Tennessee economist Bill Fox and economists in Haslam's Department of Revenue and the Legislature's Fiscal Review Committee.

The Funding Board comprises Haslam's finance commissioner, Larry Martin, and three constitutional officers appointed by the GOP-controlled Legislature: Comptroller Justin Wilson, Secretary of State Tre Hargett and Treasurer David Lillard.

Funding board members are banking on a current-year surplus of up to $353 million, and revenue growth next year of as much as $348 million. Legislative estimates say the fiscal 2017 budget year could see as much as $662.6 million in new, recurring revenue over and above the $10.4 billion budgeted for the general fund this year.

Tennessee's general fund pays for most state government operations in areas ranging from K-12 education to TennCare, the state's Medicaid program. The current total budget, which includes federal funds, college tuition and operations as well as other areas of government, is more than $33.4 billion.

The current budget provided an estimated $503.4 million in improvements to education, TennCare, higher education, prisons, employee pay raises, insurance and debt service, according to legislative estimates.

During last week's State Funding Board meeting, Wilson conceded the estimates for next year are at "the low end," but added, "I think they're appropriate."

Since the economists' presentations, Wilson said, issues such as the terror attacks in Paris as well as "indications" of lower holiday sales — which would reduce state sales tax collections — have emerged.

Martin agreed, saying, "We enjoy robust growth today and a good bit of that is the strong growth of sales tax, and sales taxes represent a good part of our revenue source. But you have to have some concern about the sustainability of that."

A legislative estimate pegs the amount of one-time money available in the upcoming 2016-2017 budget, the surplus if you will, at $574.3 million.

Speaking last week to the Rotary Club of Nashville, Haslam addressed the surplus and the budget in general.

"Tennessee right now has a surplus and people say, 'Well, how'd that happen?'" said Haslam, a businessman before embarking on his political career. "People say something to me like having a surplus was a bad thing. Where I'm from, having a surplus is a good thing."

Governor under pressure

Haslam is expected to be on the defensive on at least two major budget fronts during the 2016 legislative session.

The first is transportation funding, where he is trying to make the case that Tennessee needs to raise fuel taxes for road building and maintenance. Highway money comes from gas and diesel taxes, not the general fund, and has been basically flat for several years.

Some lawmakers are demanding the state repay $280 million taken from transportation by two prior governors.

The second is pressure on the state's Hall income tax of 6 percent on interest and dividends.

Senate Judiciary Committee Chairman Brian Kelsey, R-Germantown, has struggled to phase out the levy for several years. Emboldened by the surplus, Kelsey is now calling for outright repeal. That would cost the state some $285 million a year going forward.

Haslam told the Rotary Club last week: "There's been a lot of folks who have said forever we should do away with [the Hall tax]; I frankly don't think it's a good tax. And if we were starting from scratch, I would say we should not have that, there's other, better ways to do that.

But the state has "a very narrow revenue base" built mostly on sales tax, he said. The No. 2 revenue source is business franchise and excise taxes. The remainder of taxes for the general fund are a mixed lot and include the Hall.

If the Hall goes away, how will the state replace that $285 million, Haslam asked, noting he has cut some $450 million over five years, plowing it back into new needs in other areas.

Moreover, proceeds from the Hall tax are split with the local governments where those who pay the tax reside, he said. To avoid hurting those goverments, the state would have to make up that loss somehow.

"I have a major problem with that," Haslam said.

"One, that's more money from us."

Second, he said, most of the local Hall money goes to city and county governments where a good number of wealthy people live. He cited Oak Hill, a town in Davidson County where the governor's mansion sits.

"Oak Hill does pretty well from the Hall income tax," Haslam said. "But if we take that off, we're going to say all Tennesseans are going to be paying the price to keep the residents of Oak Hill whole. There's just something fundamentally unfair about that to me."

He cited rural Scott County, with 12 percent unemployment, whose state tax dollars would be sent to wealthier communities to make up for the Hall losses.

"Until we find a way to address that, I don't know how to take care of that either," the governor said.

Haslam on state budgeting

The governor said cutting government is "really hard."

"But my view of government is this," he said. "You can just keep doing things the way you've always done and add a little bit to the budget every year to take care of inflation. Or you can step back and say are we spending money the way we should be? The world's changed a lot in the last 20 years and we evaluate our budget to make sure that fits."

That's what he has done for the past five years, said Haslam, who intends to leave office at the end of his second term without increasing sales taxes.

If he hadn't tightened the budget by $450 million, he said, "we would have a problem."

"Because every year the natural increases over Tenncare, our state's Medicaid program, and the Basic Education Program helping fund schools is more, usually, than the new revenue we have coming in."

He added, "What smart budget management does every year is go back and say, do we spend the same way we always have, or spend it the way we would if we were starting over again?

"And we're trying our way to do that," he said.

Contact Andy Sher at asher@timesfreepress.com, 615-255-0550 or follow via twitter @AndySher1.

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