The Tennessee Journal

A special session won't be called for another two or three weeks, because legislative leaders want to give a team they've assembled time to analyze the plan and consider the fiscal ramifications of alternatives. But if a major new tax plan is to take effect July 1, most officials agree it should be enacted in April -- not late May or early June -- to give the Department of Revenue and businesses time to prepare.

Sundquist, meanwhile, will be campaigning for his tax plan in friendly territory -- supermarkets. A few weeks ago, he told journalists that sort of public-relations strategy didn't fit his style, recalling Abraham Lincoln's remark that it's hard for someone who looks funny on a horse to lead a cavalry charge. But the governor was mounting up Friday afternoon to visit a Nashville Kroger store with state Rep. Edith Langster, a Democratic sponsor of the bill. And this week he'll appear in supermarkets in Chattanooga, Memphis, Tri-Cities, and Knoxville to trumpet the most popular feature of the plan, elimination of the sales tax on food.

A poll taken by the state Republican Party suggests the plan can be sold to the public if presented in the right way. That way, of course, is to emphasize that consumers are getting a break -- that the tax on a basic necessity is being eliminated -- and to characterize doctors, lawyers, and other businesses, many of which have paid little if any state tax other than the sales tax, as whining because they'd rather see the widow Parsons pay an 8.75% tax on bread than pay a 2.5% tax themselves on business activity.

Fight. Under the reform plan, corporate franchise and excise taxes would be replaced with a "fair business tax" applicable not only to corporations, but to all business entities, including sole proprietorships. The 2.5% tax would apply to profits and employee compensation, with the first $50,000 of each exempted and the compensation component capped at $300 million. The tax would yield an estimated $1.85 billion a year, enough to replace F&E revenue and the state and local sales tax on food with $400 million left over. The new tax would take effect July 1, but the sales tax on food would stay in place until next Jan. 1 to cushion revenue changes and give grocers time to reprogram scanners and computers.

The National Federation of Independent Business, which strongly endorsed Sundquist's re-election in 1998, announced its opposition to the proposed reform last week. Like the Tennessee Association of Business, which came out against the plan the week before, NFIB cited the levy on employee compensation as the main problem. The Tennessee Business Roundtable, which has not made a public statement of opposition, has the same concern and is lobbying to get the plan changed.

So is the Tennessee Farm Bureau, which also is trying to avoid opposing the governor. Farmers typically operate as sole proprietors. For many farmers, lawyers, and others, the tax would be essentially an income tax.

Indeed, the hallways of the Legislative Plaza have been filled with opponents to the plan. Last week, even the Nashville Songwriters Association International was lobbying against it -- songwriters are sole proprietors.

Options. The governor's staff has floated various options to business interests, hoping to mitigate opposition by lessening the impact of the compensation component of the tax. Ideas discussed include giving a credit for unemployment insurance premiums. This would be a greater benefit to companies that lay off workers, since their unemployment taxes are higher. To make up for the revenue loss from the credit, the state could add to the tax base rents and interest paid and depreciation.

But businesses haven't jumped at any of the ideas tossed out so far. They want to see written proposals and dollar figures. And besides, since any shifting presumably will produce the same revenue, if some businesses suddenly are less upset, others necessarily will be more so. The most favorable reaction has been to talk of raising the $50,000 exemptions, perhaps to $100,000, to help farmers and small businesses.

Deductibility. Part of the burden of the new tax will be borne by the federal government, since businesses will be able to deduct it from federal income tax. But many businesses won't be able to deduct it all. If they have little profit or even a loss but a large payroll, they'll pay a big state tax and will have no federal payment from which to deduct it.

The plan removes some of the state's dependence on the sales tax. Since the federal Tax Reform Act of 1986, consumers have been unable to deduct sales tax payments. State income taxes are deductible, but Tennessee has no general income tax. The state got shafted 13 years ago when then-Senate Finance Committee Chairman Bob Packwood, an Oregon Republican, put his imprint on President Reagan's tax reform bill. Oregon has an income tax but no sales tax.

Unfair as it may be -- Lt. Gov. John Wilder is still mad about it and griped to the state's congressional delegation in a meeting at the governor's mansion last week -- it is something that legislators must take into account as they consider modifications and alternatives to Sundquist's proposal.

Pressure. Because of budgetary demands, it will be hard for lawmakers to punt the issue until next year. TennCare needs shoring up to the tune of $142 million, education is crying for more money, and franchise and excise tax collections are declining -- according to state estimates -- at a rate of $100 million a year.

The F&E falloff is believed to be occurring because of the growing popularity of limited liability companies and limited liability partnerships, to which the taxes don't apply. Already some business interests are suggesting that a better solution than the governor's reform is to keep the sales tax on food and impose F&E taxes on LLCs. That wouldn't raise the kind of money the governor is talking about. But how much it would raise is something legislators will want to know as they delve into tax reform, most likely in a special session.

The governor's PR crusade on the food tax will make it hard for lawmakers to raise the sales tax again. And with 2000 an election year, they won't be excited about postponing the issue a year. But there will be some sentiment for finding a temporary solution and studying the issue during the summer and fall.

In such situations in the past, the legislature has resorted to passing a "temporary" sales tax increase while postponing permanent action. Of course, all the temporary increases eventually wound up becoming permanent, the most recent being the '92 temporary half-cent sales tax increase made permanent in '93.

If the governor and legislature are going to terminate the $550 million state and local sales tax on unprepared food and at the same time produce more revenue, their only serious options are a business tax, a personal income tax, and a broadening of the sales tax base to services and items now exempted. Those are three good reasons why it's going to be very hard to eliminate the food tax -- and why Sundquist, TV cameras in tow, will be spending a lot of time this week in grocery aisles.

THE TENNESSEE JOURNAL (ISSN 0194-1240) is published weekly for $197 per year by M. Lee Smith Publishers & Printers LLC. Copyright 1997 M. Lee Smith Publishers & Printers LLC. Reproducing in any form is a violation of federal copyright law and is strictly prohibited without the publisher's consent.