Tenn. Legislators Talk Tax Cuts in Light of $2B Cash Surplus

NASHVILLE – Based on State Funding Board projections, the Tennessee General Assembly will have close to $2 billion in extra money to distribute during the upcoming legislative session above current year spending, prompting legislator talk of tax cuts as Gov. Bill Haslam seeks a tax increase.

The Funding Board projections, adopted unanimously on Nov. 29, foresee up to $878 million in new, recurring money available for spending on an annual basis starting in the 2016-17 state fiscal year that begins June 30. Economists involved in analyzing the data suggest the figure might be conservative – as the estimates have been in recent past years.

That is an unprecedented figure for new recurring money in that state budget excepting years following a major tax increase – most notably a 2002 hike in the state sales tax and other levies that, combined, provided about $1 billion in new funding.

In addition to the bonanza in recurring funds for next year, the state is expected to have about $1 billion in surplus tax collection funds to spend on a one-time basis – or “non-recurring” money in budgeting lingo.

The Funding Board is composed of Comptroller Justin Wilson, Finance Commissioner Larry Martin, Secretary of State Tre Hargett and state Treasurer David Lillard. Under state law, it is tasked with recommending figures each year – based on projections from a panel of economists -- that serve as the basis for building a state budget in the following year.

In recent years, the board has consistently underestimated revenue. The new recurring figure incorporates $500 million of past surpluses into anticipated annual revenue for the years ahead. Beyond that, the economists projected the state can rely on a further revenue increase during the coming year of $378 million.

The 110th General Assembly will convene on Jan. 10, but plans call for meeting just three days before taking a two-week recess and returning on Jan. 30 to hear Haslam’s “state-of-the-state” address, which will include his budget proposal and, apparently, a long-awaited administration proposal for increased funding of the highway fund that is used to road and bridge construction and maintenance.

The governor’s budget proposal is virtually certain to include new spending for education, especially pay raises for teachers, and upward adjustments in spending on TennCare, necessary every year with increased medical costs and the like. He’s said to be inclined to put more money into salaries for state employees and other areas. But the size of the upswing in recurring revenue might leave room for the governor to propose some tax cutting as well as a fuel tax increase.

Senate Finance Committee Chairman Randy McNally, R-Oak Ridge, who is expected to be elected Senate speaker and lieutenant governor on the session’s opening day, and House Finance Committee Charles Sargent, R-Franklin, both said in separate interviews that they would like to seek a substantial chunk of the new recurring money go toward cutting taxes.

The veteran lawmakers both also said their personal priority in tax-cutting would be a reduction in the state’s excise tax, a 6.5 percent levy on corporate income. According to the Tax Foundation, Tennessee’s tax on corporate income is currently the 18th highest in the nation. Among Tennessee’s eight neighboring states, Arkansas and Alabama are also at 6.5 percent while the rest are lower – the lowest being North Carolina at 4 percent.

“Tax relief ought to be an important item on our agenda,” said McNally, the legislature’s senior member, adding that reducing the business tax is “my No. 1 priority” for reductions.

He and Sargent both said the state’s relatively high corporate tax rate is sometimes an impediment to recruiting new businesses to locate in Tennessee because of the lower rates in competing states. But they said other tax cuts will be considered. Among them:

• The state’s “professional privilege tax,” currently a $400 per year levy on persons holding state licenses to practice in 22 professions – examples including doctors, lawyers, investment advisors, accountants. Repeal bills were filed last session but failed to pass.

• Reducing the state sales tax on groceries, currently at 5 percent, compared to the general state sales tax rate of 7 percent on most other goods. Legislation to eliminate or further reduce the food tax – it’s been incrementally lowered in past years – are filed annually, usually by Democrats declaring the levy disproportionately impacts lower-income Tennesseans while other tax cuts in recent years benefited mostly the wealthy.

Sargent contends that lower-income citizens also would benefit from a corporate tax cut, albeit indirectly. A “single mom” making $8 an hour might save a bit on grocery bills with a cut in the food tax, he said, but lowering the corporate tax rate will bring new business to Tennessee, along with the prospect of a new job making $15 an hour.

“Which is the better deal for her – doubling her income or saving a dollar or two on groceries?” he said.

Since Haslam became governor in 2011, legislators have with his approval repealed the state’s inheritance tax, which previously applied to estates of more than $5 million in value, and a “gift tax” that applied to voluntary transfers from one individual to another of more than $10,000.

Last session, legislators voted to repeal the state’s Hall income tax on dividends and investments. The law cut the Hall tax rate from 6 percent to 5 percent this year and calls for a 1 percent reduction in following years so long as the state has a budget surplus. The present revenue situation assures that another cut from 5 to 4 percent will follow in the coming year. The law mandates that the entire tax will be repealed by 2022, regardless of the state’s fiscal situation.

McNally and Sargent said they are open to increasing taxes on fuel to help the highway fund even while cutting other taxes, though acknowledging that raising taxes while state revenue is a record high levels may seem unreasonable in the general public perception.

“You have to understand those are two separate funds,” Sargent said, acknowledging that many people do not and that makes legislators uneasy. Still, “with enough people selling the idea,” he said there’s a prospect for both raising and cutting separate taxes.

Sargent noted that while the state general fund is flush with money, the highway fund – funded by law only money from fuel taxes that have not been increased since 1986 and are lower than in most states – has a $6 billion backlog of projects awaiting completion.

“It’s hard for people to distinguish that we have two pots of money and we don’t want to mix them,” said McNally, though he, too, said a majority of legislators may be sold on the proposition.

Indeed, McNally suggested that the combination of a tax increase on fuel coupled with tax cuts in other areas could be presented and sold to legislators as “revenue neutral” if fashioned so that overall state taxation was not changed in the state budget.

As for the stash of one-time money available in the coming session, the two legislative budget overseers said the surplus funds can go toward paying for new buildings on college campuses and elsewhere with cash instead of by issuing bonds, as normally the case, and for building up the state’s “rainy day” savings account.

“There are still a lot of needs out there,” McNally said. “I know when revenues are short, there are not many people who come by and have proposals (for state spending). When revenues are good, there’s a steady parade of folks coming by.”

Already, the soon-to-be lieutenant governor said, the parade of people with spending proposals for the coming year is underway.

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