Tax Cuts Amid Budget Shortfall?

Since the Republicans gained control of the state Legislature, they have cut taxes each session and annual revenues to the state have been cut by an estimated $200 million, but they may face opposition from the governor if they want to cut taxes again.

The target for next session is expected to be the Hall Income Tax, a tax on income from dividends and investments, and it may set up a battle with the Republican governor. Gov. Bill Haslam was supportive of abolishing the gift tax and the inheritance tax and cutting the sales tax on food.

But this year he has warned that TennCare (Medicaid) rolls are increasing as people are signed up during the Affordable Care Act implementation and there will have to be a major infusion of cash from the state.

Meanwhile, state tax revenues have been below projections over the last several months.

Balancing a budget with declining revenues, new financial obligations, and a tax cut will be a challenge. Haslam has already said he expects next year's budget to be the toughest he has faced.

A compromise might be phasing in a cut in the Hall Income Tax over a period of years so as not to hit the state budget all at once. Abolishing the inheritance tax was phased in over a period of years.

Complicating the issue is that a healthy component of the Hall Tax goes back to the local county where it is paid. Counties like Knox County, with retirees and high investment incomes, would be especially hard hit if the tax were abolished.