Meeting Tennessee's Needs Today and Tomorrow: A call to improve Tennessee for its communities and its people

8/7/2019 Meeting Tennessee's Needs Today and Tomorrow: A call to improve Tennessee for its communities and its people

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Meeting Tennessees NeedsToday and Tomorrow

A call to improve Tennessee forits communities and its people

Tennesseans for Fair Taxation 2010


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Funding Tennessees Future: A Birds Eye View

For Tennessee to be a rst-class place to live and do business, we need to make sure our currefuture workforce is educated, our bridges and roads are safe, our rivers and parks are clean, our commuprotected, and our fellow Tennesseans have access to affordable housing and health care.

We collect revenue for valuable public structures like elementary and secondary education, toll-freroads, re and police protection, thousands of acres of state parks, and affordable care and assistance whfamilies face unexpected circumstances.

But times are tough for Tennessee. Governor-elect Bill Haslam has notesd the state faces a $1.5gap between the money thats available from taxes and whats needed to meet the states essential obliga

As a result:Our childrens teachers could see their fth year without a raiseCollege and university students will likely pay higher tuition for fewer available coursesTennCare coverage could be further decreasedEmergency mental health services could be eliminatedOur state parks could be open less or closed entirelyGroup homes for foster children could be closedFunding to protect our natural resources could be cut or eliminated... and thats just the beginning.

The budget gap exists because of basic aws in our states tax system. Most states raise moneyequal mix of sales tax, property tax and income tax. Tennessee relies too heavily on just one source ofsales taxes make up two-thirds of our revenue from taxes. But as Tennesseans spend less to save moneycurrent economy, our sales tax revenues have fallen - consecutively for 22 straight months until slightlyery was seen in mid-2010. Revenues cannot currently meet investment needs, despite the fact that Tenneshas the highest sales tax in the nation. We lose additional revenue to neighboring states and Internet comwhen shoppers turn to these options to avoid paying our high sales tax. The state could also raise signienue and avoid cuts in vital public structures by closing loopholes that allow multi-state corporations topaying taxes when they do business in Tennessee.


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Tennessee is also among the minority of states that tax food. This means that as low-income andclass families struggle to pay for just the bare necessities for their families, they are also paying the higpercentage of their income in taxes to fund the public structures every Tennessean enjoys. In fact, thoseless than $17,000 a year pay more than three times what those making $414,000 a year or more pay inpercentage of their income.

Tennessees tax structure is Upside-Down: We ask those who make the least to pay the most andthose who make the most to pay the least. We dont follow sound economic principles like diversifyingenue sources and ensuring those revenue options that are available (like closing corporate loopholes) areexplored. No wonder we face a billion-dollar budget de cit! Fortunately, Tennessee has options that couldmuch-needed revenue and still provide a tax cut for the vast majority of its citizens.

The future of our state and communities is directly connected to how we deal with Tennesseesbudget shortfalls. Well-educated students, well-trained workers, a healthy environment and functioning infrastructures are the foundations of a strong economy. Now more than ever, we need to make sure those sare able to respond; to provide encouragement and protection to those hardest hit in these times, and toway for a robust recovery. This is not the time to dismantle the structures we need to move our stateAny responsible approach to addressing the states funding issues requires a hard and balanced look at b

we spend money and how we bring it in. Fixing our awed tax system needs to be part of that equatiFunding Tennessees Future: The Landscape

A quick glance at Tennessees rankings compared to other states shows that our quality of life is directlto the revenue the state receives from taxes.

REVENUE

When we consider the size of the states population vs. its tax revenue, Tennessee ranks 48th .Tennessee also ranks 48th when we consider our revenue as a percent of the states total personal in

TENNESSEES PERFORMANCE

43rd in nancial commitment to public health (per person)47th healthiest state

50th in state and local spending for elementary and secondary school (per student)41st in percent of 4th graders who read at a 4th grade level46th in percent of 4th graders who can do 4th grade math42nd in high school graduation rates49th in state and local spending for higher education (per person)44th in higher education enrollment41st in percent of population who graduated from college49th safest state, with the 2nd highest violent crime rate in the nation47th most livable state

* See State Rankings 2009 edited by OLeary Morgan and Morgan


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Debunking Myths that Taxes Undermine Economic Growth

One reason other states are readily raising revenue as an alternative to more cuts is that they caa wealth of examples to debunk the rhetoric that raising taxes to fund services in a state is harmful tomy.

Taxes Do Not Undermine State Economic Growth: Research consistently show that, contrary to right-wingrhetoric, there is no link between tax increases and job loss. States with higher personal income tax raterienced signi cant job growth in the past decade, as the Fiscal Policy Institute and Center for Working Fpoint out in their report,Back on Track and as the Center on Budget and Policy Priorities found in a simireport.

Moreover, according to a 2008 Information Technology & Innovation Foundation analysis, states wsome of the higher marginal income tax rates, including New York and Maryland, have more innovativeeconomy industries. Likely as a result of larger investments in infrastructure, education, and technology,states are better suited to foster economic growth that is sustainable and well-paying in an increasinglyglobal competition for jobs. This builds on analysis by the Institute on Taxation and Economic Policy (ITdetailing that states that collect the highest percentage of personal income in taxes actually sustain highercome growth.

Similarly, an older study by the California Budget Project (CBP) analyzed state economies and cocludes, "[s]tates that enacted large tax cuts between 1994 and 2001 reducing revenue by at least 7 pesubsequently experienced weaker growth in jobs and personal income and larger increases in the unemplorate, on average, than other states."

Progressive Taxes Don't Cause Out-Migration of Wealthy Residents: Opponents of progressive income taxreform like to argue that tax increases cause wealthy residents to leave a state. In fact, states that havethe top rate in recent years have not experienced any signi cant out-migration of wealthy residents:

California: The California Budget Project found that there was a signi cant growth in millionairehouseholds after California passed higher PIT rates in the 1990s and again in 2004. In fact, the numbefornia millionaires increased by 37.8 percent between 2004 and 2006.

New Jersey: A Princeton University report discovered that the passage of a higher top rate in 2"little effect on migration patterns among half-millionaire households.

New York: After the statetemporarily raised income taxes on thwealthy from 2003 to 2005, the number of high income tax returns grewpercent, from 250,000 to 325,000. ANew York Times article, entitled TaxeNot Seen as Making the Rich Flee NYork succinctly articulates: [T]hereis surprisingly little evidence to supportthe proposition that rich New York-ers would bolt if forced to pay higheincome taxes. Though tracking themovement of wealthy taxpayers fromstate to state is dif cult, experts onpublic nance and migration say theyhave yet to document a substantial rdrain in states that have raised incomtaxes in recent years.


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New Revenue is Needed to Invest in Economic Recovery

During an economic downturn like the one Tennessee continues to experience, economists say progressive revenue generation is far preferable to deep cuts, as it allows states to provide funding for esseprograms, pump money into the economy, and protect working families in this time of hardship. A budrelies too heavily on cuts will not only force layoffs of state employees, but will also cut off funding ifor crucial services, thereby reducing dollars in the private sector.

Peter Orszag, Director of the Of ce of Management and Budget, and Nobel prize winning econoJoseph Stiglitz con rm: [T]ax increases on higher-income families are the least damaging mechanism foring state scal de cits in the short run. Reductions in government spending on goods and services, ortions in transfer payments to lower-income families, are likely to be more damaging to the economy inrun than tax increases focused on higher-income families.

As a recent report by the Economic Opportunity Institute denotes, "every dollar of state spendingates $1.41 of economic activity. Much of that spending 62%, or 88 cents boosts the private sectorstate spending means fewer purchases from suppliers, reduced contracts with service providers, less moneyfrom public and private employee paychecks circulating through local businesses and of course, fewerservices."

Also, spending on programs that assist low and middle-income families is smart economic policy.assisting working families, who will more readily spend their funds on basic necessities, the governmentboosting short-run demand and fostering market activity. For instance, Zandi nds that increasing food sspending creates $1.73 in demand for each dollar spent by the federal government.

Every dollar of state spending generates $1.41 of economic activity. Much of that spending 62%, or 88 cents boosts the private sector.

- Economic Opportunity Institute

The Economic PolicyInstitute (EPI) pro-vides this chart illus-trating the danger ofstate budget cuts asthey ripple throughthe economy; teach-

ers, nurses and policeare laid off, statefunds supportingprivate sector activ -ity are reduced, andindividuals receivingstate support stopspending in their lo-cal communities.


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Funding Tennessees Future: Fixing Our Upside-Down Tax System

The state of Tennessee struggles to ad-dress its lag in education, health, public safetyand other areas because it has what expertscall an Upside-Down Tax System.

The simple reason our tax system isUpside-Down has to do with relying too muchon sales tax and not enough on income tax.Not only does the sales tax not raise enoughrevenue we saw it drop for 22 straightmonths by March 2010 but it hits aver-age families hard as they buy necessities likefood. They end up paying almost 12 percent oftheir income in all state and local taxes, whilethe wealthiest families pay little more than 3percent of their income.

Financial experts say xing the Up-side-Down system is the most practical ap-proach to getting the state on the right track.

Taxes interest and dividends through the Hall income tax


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* Institute on Taxation and Economic Policy Report: Who Pays: A Distributional Analysis if the Tax Systems In All 50 States 3rd edtiion, November 2009


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Funding Tennessees Future: We Have Options!

Tennessee can move forward by changing its fundamentally awed, imbalanced approach to raisinrevenue. The state needs to reduce its dependence on the sales tax and embrace a more balanced, commapproach to funding state services. For the long-term, Tennessee needs to consider comprehensive tax restturing, including a full repeal of the food tax, a reduction of the sales tax, closing corporate tax loophoestablishing a progressive state income tax.

Proposals such as the Tax Cut and Job Creation Act, introduced in the 2009-2010 session, do exthat. Other initiatives such as the Food & Business Tax Fairness Act will make immediate and measurabress in addressing the fundamental problems with Tennessees tax system and boosting local businesses.

With a fair and adequate tax system, we can strengthen the public structures that bene t us allthe state on the right track by providing proseperity, quality of life, and a better future for our children.

The Tax Modernization & Economic Stimulus ActThe Tax Modernization and Economic Stimulus Act , Senate Bill 2054 by State SenatorReginald Tate and House Bill 2182 by State Representative Larry Turner, will result in:

Targeted tax breaks to those hit by the current economic downturnThis plan will provide much needed tax breaks to more than 60% of Tennesseans, those low-

and middle-income families most likely to put that money back into the local economy.An end to the unjust food tax

Religious leaders, policy makers, and others have long recognized that the taxation of grocery food is one of the most unjust taxes any state can levy, and hits the least af uent thehardest. Tennessees food tax, the third-highest average state and local food tax in the nation,takes an equivalent of 29 days worth of groceries from every Tennessee family each year. Withpassage of the Tax Modernization Act, the days of taxing grocery food will be over.A more equitable share of taxes paid across all income groups

Under Tennessees existing tax laws, as a percentage of their income, low-income familiespay three times as much tax as the wealthiest families. Thats because Tennessees extremelyhigh sales tax is applied to food, clothing, furniture, and other basic goods. However, the salestax does not apply to real estate investments, stocks and bonds, college tuition or private K-12education, attorney fees, or maid service... expenses more often incurred by higher incomefamilies.

By embracing a more diverse and balanced tax system, including a lower sales tax, nofood tax, and a progressive income tax, the tax share would be distributed more equitablyacross all income groups. The regressive nature of the lower sales tax would be largely offsetby the progressive nature of the income tax.Tennessee would be able to compete more effectively with its neighbors

With 50% of the states population living in counties that border another state, Tennesseeshigh sales tax, currently the highest average state and local rate in the nation, and the highfood tax, drive shoppers over state lines and onto the Internet. This hurts Tennessees localbusinesses struggling to compete, and causes signi cant job loss to the state, losses Tennesseecan ill-afford in these trying economic times.


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One billion dollars in much-neededrevenue to avoid damaging cutsand invest in the common good

While the federal stimulushelped avert some of the worstbudget cuts for the time being,Tennessee will be right backto where we started when thestimulus runs out, with at leasta $1 billion budget shortfalljeopardizing the public structuresessential to a strong economyand healthy communities.Additionally, the federal stimuluswill do nothing to change ourrankings relative to other states ina host of important investmentsfrom education to health care toenvironmental protection, since allstates are receiving the stimulus.To lift Tennessee up from thebottom, we need to change policieshere at home.

Even with the additional $1billion this plan raises, Tennesseewill still be a low-tax state, moving from 49 th to 45th in state and local taxes as a percentage of income. This modest change will enable Tennessee to make much-needed investments in ourcommunities.A tax system that can stand the test of time and the 21 st Century economy

A variety of factors, including the shift to a service-based economy, the growth of Internetand cross-border sales, and changing spending patterns in general, have eroded the sales taxbase over the last several decades. To compensate, legislators have raised the sales tax rateevery few years. However, even with the sales tax increases of 1971, 1976, 1984, 1992, and2002, taxes as a percentage of personal income in Tennessee have actually declined since 1970.

By modernizing our tax system, including diversifying the revenue sources our statedepends on, Tennessee will be able to more effectively manage its nances over the long haulThats because income taxes are unaffected by the shift to a service-based economy or thegrowth of Internet sales, thereby providing a more stable and reliable revenue source over thelong-term.

By moving past the endless cycle of budget shortfalls that have dominated state politics inboth good and bad economic times, Tennessee would be able to focus on the kind of long-termplanning it will take to build an economy and a state that can compete in the 21 st Century.


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Funding Tennessees Future: Paving the Way

Tennesseans for Fair Taxation supports the following legislative proposals that wouldaddress the dire need for revenue in our state while responding to the inequities of ourcurrent Upside-Down system. Please contact your representatives and encourage them tosupport these bills that would improve the quality of life for all Tennesseans.

The Tax Modernization and Economic Stimulus Act (SB2054/HB2182) would:

Eliminate the sales tax on foodReduce the general sales tax to a 6.75% at rateEliminate the Hall income tax

Replace the revenue with a personal income tax that increases with income level fromto 7.75%Exempt

Individuals: $17,500Head of household: $22,500Couple: $35,000Dependents: $2,500

Raise $1.1 billion in revenueProvide a tax cut for most Tennesseans


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TFT 2010 Legislative ProgramI. Internet Parity bill SB1741/HB1947

This bill will extend the sales tax to goods that are sold over the internet by vendors who use localaffiliates to solicit business. Similar bills have passed in New York, Rhode Island and North Carolina.

II. Food and Business Tax Fairness Act SB0502/HB1350The current method of tax accounting, "separate reporting", requires each entity doing business in thestate to prepare a separate tax return. This leaves businesses the opportunity to set up subsidiaries instates with more favorable tax laws where they can shelter TN income through a variety of schemes paying rent to themselves, paying themselves for the use of their logos and trademarks, etc. Most multistate businesses do this because they have an obligation to their shareholders to maximizeprofits and share value. "Combined reporting" would nullify all these schemes. Applying the revenueestimates done in other states that have considered a switch to "combined reporting" to TN suggeststhat TN could collect $120$250 million additional revenue.

III. Tax ModernizationThere are three tax modernization bills. The first was introduced in 2009 and will bring a sweepingreform to Tennessees tax structure and produce an additional $1.1 Billion of revenue to preserveTennessees economy and government capacity. Two tax cut bills have been filed this year. They willboth preserve Tennessees economy and government capacity, though not as robustly as the taxmodernization bill ($200 Million of additional revenue). One has a flat 5.5% income tax rate, the otherhas two tiers at 3% and 6%. Details are shown in the table below.

ChangeItem

TaxModernizationSB2054/HB2182

Tax Cut and JobCreationSB3235/HB3597

Tax Cut and JobCreationSB3236/HB3596

Food tax Eliminate state & localfood tax

Eliminate state food tax Eliminate state food tax

Other salestax

Reduce to 6.75%unified rate

Cut state part of sales taxon other goods from 7% to5%

Cut state part of sales taxon other goods from 7% to5%

Franchisetax

No change Eliminate real propertycomponent and cut rate onremainder from 0.25 to0.125%

Eliminate real propertycomponent and cut rate onremainder from 0.25 to0.125%

Hall incometax

Eliminate; holdharmless local revenue

Eliminate; hold harmlesslocal revenue

Eliminate; hold harmlesslocal revenue

Pay with Graduated rate incometax, 3.57.75%

Flat rate 5.5% Two rates: 3% on first $30,000 over exemption;

6% on higher amountsExemptions Individuals: $17,500Head of household:$22,500Couple: $35,000Dependents: $2,500

Individuals: $20,000Head of household:$30,000Couple: $40,000Dependents: $2,500

Individuals: $20,000Head of household:$30,000Couple: $40,000Dependents: $2,500

Revenueimpact

^ $1.1 Billion ^ ~$200 Million ^ ~$200 Million

Reduces taxfor

6570% 6065% 7075%

Localrevenueimpact

Hold harmlessprovision

Hold harmless provisiononly needed for Hall tax

Hold harmless provisiononly needed for Hall tax


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Funding Tennessees Future: Tennesseans Support It

Research conducted by Middle Tennessee State University and included in its State Report, Spr2009, shows 46 percent of respondents favor an income tax in Tennessee. Support for an income tax imarkedly with the mention of corresponding cuts in sales and food taxes and other trade-offs.

Recent editorials in MemphissCommercial Appeal , Knoxvilles News-Sentinel , Chattanoogas Times

Free Press , and NashvillesThe Tennessean have all called for reform in our states tax structure.The following organizations are members of Tennesseans for Fair Taxation, and join us in our camore fair and progressive tax structure that ensures adequate revenues for the bene t of all Tennesseans:

Arc of TennesseeCatholic Public Policy CommissionCatholic Charities of Tennessee, Inc.Cumberland Countians for Peace and JusticeCumberland Center for Justice and PeaceChurch Women UnitedChristians for Justice and PeaceCommon Cause of TennesseeJustice, Peace, Integrity of CreationEast Tennessee Jobs with JusticeLeague of Women Voters of TennesseeLWV / Knoxville ChapterLWV / Nashville ChapterLWV / Oak Ridge ChapterMANNAMid-South Center for Peace and Justice

National Alliance on Mental Illness of TennesseeNational Association of Social Workers of TennesseeOlivet Baptist Church (Memphis)Public Issues ForumStatewide Organizing for Community eMpowermentSocial Action Comm. / Gr. Nashville Unit. Univ. ChurcSolutions to Issues of Concern to KnoxvilliansTennessee Alliance for ProgressTennessee Citizen ActionTennessee Conference on Social WelfareTennessee Education AssociationTennessee Health Care CampaignTennessee State Employees Association

Documents

Meeting Tennessee's Needs Today and Tomorrow: A call to improve Tennessee for its communities and its people