Kooky Koch Cuts: Tennessee Doesn't Need More Tax Cuts

It's heartening to see how cooler heads in the state Legislature managed to thwart a concerted effort by right-wing interlopers to ram through a tax cut at the very time when Gov. Bill Haslam has felt compelled to drop his proposed pay raise for teachers because of a state revenue shortfall.

Minions of the Kansan Koch brothers and the ubiquitous Grover Norquist had extracted a pledge from more than 90 of 132 legislators to repeal the state's Hall income tax before leaders of the Senate Finance Committee outmaneuvered them. Revenues from the 6 percent tax on dividend and interest income are allocated 62.5 percent to the state and 37.5 percent to localities. But the legislation to phase it out over four years would have only applied to the state portion of the tax because local governments had managed to extract a pledge of their own from its sponsors not to impinge on their own fiscal straits.

When the bill came before the Senate Finance Committee, its Chairman Randy McNally guided through a killer amendment that would have phased out the tax entirely. The bill's sponsor, Sen. Mark Green of Clarksville, beat a hasty retreat by saying that "With this amendment, the bill violates promises made to my community, and I can't go forward with it." So state officials, starting with Haslam, who opposed the cut, have their local counterparts to thank for preserving the $250 million total annual revenue derived from the tax—at least for the nonce.

In bringing his Americans for Tax Reform gig to Nashville to plump for the Hall tax repeal, Norquist showed no regard for the state's fiscal wellbeing. Nor did he give any heed to the fact that Tennessee is a bottom-feeder in state revenues per capita (ranking 44th to be exact).

Rather, Norquist made it clear that bagging Tennessee was just small game in his larger hunt for tax eradication nationally. "Getting rid of the Hall Tax is an extremely important message—just an important thing for businesses or individuals looking to stay in Tennessee or move to Tennessee, but the rest of the states are looking at this and making decisions on following in this direction," Norquist told a gathering of legislators.

The most disgusting pitch of all came from the Koch brothers' taxophobic Americans for Prosperity, who polluted the airwaves with a bombardment of blatantly false radio ads. The pitch:

"Every day some seniors have to choose between buying necessary medication or buying food. Thankfully, over 92 legislators have committed to help our seniors by repealing the Hall income tax. That's over two-thirds of the Legislature. Unfortunately, Gov. Haslam doesn't think our seniors should get tax relief. Governor Haslam is blocking tax cuts that would help those that need it most."

Except for recognizing Haslam's opposition, nothing could be further from the truth. In fact, the Legislature voted last year with Haslam's support to raise the exemption from the tax for people 65 and over to $33,000 for individuals and $59,000 for couples. The bulk of the revenues from the tax comes from wealthy individuals with incomes pushing up to $1,000,000 and above.

Repealing the Hall tax would further erode a state revenue base that's already been impaired by two other tax cuts the Legislature has seen fit to make over the past two years. One reduced the sales tax on groceries to 5 percent from 5.5 percent at a cost of $46 million. The other phases out the state's inheritance tax at an annual cost in excess of $100 million when the tax goes poof in 2016.

It doesn't take a math whiz to figure out that the foregone revenue would have been sufficient to cover the $42 million cost of the 2 percent pay raise for teachers that Haslam cut out along with $17 million to cover a modest pay raise proposed for state employees that was another casualty of his recent budget cuts.

If Haslam is going to achieve his laudable goal of making Tennessee the fastest-growing state in the nation for teacher compensation, he's going to need state revenue growth far more robust than the anemic .8 percent so far this fiscal year. That goal is best achieved by completing the implementation of what's known as BEP 2.0 that former Gov. Phil Bredesen set in motion in 2007. Bredesen's planned enhancements to the Basic Education Program school funding formula would increase the portion of teacher salaries borne by the state to 75 percent from 65 percent. But he only got halfway toward that goal when the Great Recession stalled further progress. Full implementation would cost an estimated $146 million a year atop the $50 million or so a year in BEP funding increases due to enrollment growth and inflation factors.

It may take Congressional enactment of much-needed legislation to allow the states to collect sales tax on e-commerce to achieve this goal. By the Haslam administration's estimate, the Senate-passed version of this authorizing legislation would yield the state $350 million a year including boosts in local-option sales tax collections.

Unless and until these revenues are realized, there's no room for further tax reductions.