New Source of State Revenues Needed

Lawmakers should look to Internet sales for one option

The state of Tennessee has never before suffered revenue declines of the magnitude experienced over the past two years. After falling by more than 8 percent to $11.2 billion in the fiscal year ended June 30, a further 3 percent reduction is now being projected for the current fiscal year. And Gov. Phil Bredesen doesn't foresee a recovery to pre-recession levels until 2013 at the earliest.

That means five years of debilitating state budget cuts (mitigated in the first two years by a fortuitous infusion of federal stimulus dollars) in everything from higher education and children's services to nursing-home care for the elderly and TennCare. State employees, also including university faculty members and public-school teachers, are looking at five years without a pay raise while thousands of prisoners may be allowed to walk free because the state can't afford to keep them incarcerated.

Under these circumstances, I for one would like to think that serious consideration would be given to some form of revenue enhancement—call it a tax increase, if you like. After all, the state's sales tax rate has been raised under every preceding governor for the past 40 years to cover revenue shortfalls much less severe than those now faced. Yet neither Bredesen nor any of the candidates to succeed him in next year's election has shown any inclination to address the state's plight by any means other than belt-tightening.

So why has Tennessee's body politic, or at least its politicians, become more averse to increased taxes than in times past? Part of the answer is, of course, that they don't want to add to the burdens of people who are already struggling to make ends meet in the midst of a recession. But the larger part of the answer in any longer run is that the two prime recourses for raising state revenues are seemingly foreclosed.

Ever since a firestorm of grassroots protest thwarted former Gov. Don Sundquist's attempt to impose an income tax in 2002, proclaimed opposition to such a tax has become almost a litmus test of viability for anyone seeking statewide office. At the same time, the one-cent increase (to 7 percent) in the state's sales tax that was adopted in the alternative has made it, along with local-option sales taxes of up to 2.75 percent, the highest of any in the nation. Preclusively as well, the state's business taxes are also at the high end among surrounding states.

One avenue that remains open is extension of the sales tax, now primarily on goods, to cover an array of services. In an increasingly service-oriented economy, an ever-shrinking percentage of consumer outlays is subject to sales tax, which is part of the problem with the state's reliance on it as its primary source of revenues. Application to health-care providers alone could yield $500 million, and the total take from covering other professionals, tradesmen, dry cleaners, and the like has been estimated to exceed $2 billion.

However, a Tennessee Tax Structure Study Commission appointed in the wake of the state's 2002 fiscal crisis concluded that "it would be unwise to subject any more services to sales and use tax... due to the potential for ‘tax pyramiding,' difficulty in administration, and the potential negative impact such taxes could have on attracting business." Needless to say, just about all of the service providers who would be subject to such a tax oppose it.

The one major new source of revenue that's begging to be tapped is Internet, catalog, and other so-called remote sales to Tennesseans by vendors who don't have a place of business in the state. The U.S. Supreme Court has ruled that such vendors aren't subject to sales tax, but left it to Congress to set terms under which they could be.

Tennessee has been in the forefront of a coalition of states that undertook to achieve uniformity in the workings of their sales tax in an effort to overcome a Supreme Court finding that disparities made it unduly burdensome for sellers to collect them. Indeed, the coalition known as the Streamlined Sales Tax Governing Board has its headquarters in Nashville. The board's executive director, Scott Peterson, projects that taxation of remote sales would produce $23 billion in revenues nationally by 2012, with $748 million going to Tennessee.

With nearly all states in a budget bind, one would think they'd be making a concerted push for Congressional approval of enabling legislation that's been pending for several years. But that doesn't seem to be happening, and it remains bottled up by opposition from e-commerce giants like Amazon.

Moreover, in Tennessee's case, the state Legislature has twice deferred the effective date of its adoption of the uniformity agreement. A stumbling block had been that the agreement provided for directing local-option sales taxes to the locality where a product was delivered rather than the one in which a sale took place. This could have meant a significant diversion of revenues from shopping centers like Knoxville frequented by customers from surrounding counties who could have their purchases delivered to their homes. In 2008, though, the agreement was amended to let the revenues go to the locality in which a transaction occurs.

It's clearly time for Tennessee lawmakers, both state and federal, to do their utmost to enable the state as well as its localities to capture a significant source of revenue