Rep. Tommy Head has moved into a new phase in the ongoing battle for state tax reform. He has started blackmailing members of the business community.
Head gave the community an ultimatum either to come up with a revenue alternative, or he will push legislation like the real estate transfer tax.
These tactics should come as no surprise. The state has to drum up revenue from somewhere. As long as Tennessee does not have a broad-based income tax, the business community will take the hit.
Let us hope we do not have to go through the hell that Connecticut did before it reformed its tax structure.
Lacking an income tax, Connecticut was forced to turn to business for more and more of its tax revenue. By 1991, Connecticut's business taxes were close to 14 percent. Businesses were leaving the state in droves, moving to other states with lower tax rates. The showdown came when Connecticut's defense industry was downsized, plunging the state into an economic recession and the state into a $2.7 billion shortfall, equal to 35 percent of the its total budget.
It was at this point tax reform was finally passed in the state with the support of the business community.
Tennessee's business community will be major beneficiaries of tax reform in the following ways.
Since business pays approximately 31 percent of the state's sales tax, lowering the sales tax rate will allow business to reap additional profits, especially if the price of goods does not drop as much as the sales tax reduction. People will spend less on sales taxes and more on goods and services. With a lower sales tax rate, consumers will come back to Tennessee to shop instead of shopping in neighboring states.
The state legislature will not need to raise business taxes every few years to balance the state budget. Tennessee has a history of high corporate taxes as a result of its reliance on slow-growing revenue sources and a narrow tax base. A broad-based, balanced tax structure will provide a stable and sufficient revenue stream, thus eliminating our state's recurring revenue crises. Maybe someday Tennessee could be in the enviable position of reducing taxes, like many of our neighboring states with an income tax have done recently.
Adequate funding of education will create a more educated work force, which will enhance Tennessee's economic development. Unfortunately, Tennessee is currently near the bottom in the United States in education funding, in number of people with a high school education, in number of college graduates and is near the top in the percentage of children living in poverty.
If current trends continue, the Tennessee Department of Labor and Work Force Development predicts Tennessee will have a shortage of college graduates for business' needs by 2008. Adequate funding of early childhood development programs, K-12 education and higher education will create a more educated and skilled work force. This will help Tennessee's businesses expand and help our state recruit new businesses, especially high-tech industries.
Businesses will be able to make forecasts with more accuracy. The unpredictability of Tennessee's current tax environment makes it difficult for businesses to plan for the future. With a predictable revenue stream, taxes will not be raised every few years as they are now.
Business will flourish when Tennessee has a modern tax base that is not overly reliant on sales tax as its base. Tennessee, like the rest of the country, is moving away from goods and towards a service economy.
Many services aren't taxed and cannot easily be taxed. Tennessee needs a balanced, modern tax system that is not overly reliant on sales tax as its main source of revenue.
The sales tax is a diminishing tax. Not only is the sales tax regressive, it also will not sustain economic growth in the 21st century.
Tennessee's over-reliance on sales tax as its major source of revenue is our tax structure's fatal weakness. Tennessee derives 76 percent of its revenue from sales taxes and selective sales taxes like fuel taxes and "sin" taxes on tobacco and alcohol. This dependence on sales taxes is the highest percentage in the Southeast and the fourth-highest percentage in the United States.
Tennessee's high sales tax is harmful to business. It hurts business by encouraging catalog and Internet sales and border drain (Tennessee is surrounded by eight states with lower sales tax rates). Tennessee has one of the highest sales tax rates in the nation, and unlike the majority of states Tennessee taxes groceries. The higher our sales tax rate gets, the more Tennessee business will suffer as people seek out alternative ways to purchase goods.
A modern tax system will enable Tennessee businesses to compete with businesses in other states and nations in the 21st century more successfully. Tennessee has the highest reliance on business taxes for revenue of any state in the Southeast.
If tax reform is not passed, business taxes will probably be raised. This will put Tennessee businesses at a competitive disadvantage with other states. If the legislature votes to increase business taxes or to tax certain services, some businesses, especially highly mobile service businesses, may chose to relocate. This would further erode Tennessee's precarious tax base.
What is it going to take to get the business community behind tax reform? A Connecticut-style recession? Or Tommy Head's blackmail?
Either way, the business community needs to quit dragging its feet. The longer it takes Tennessee to get a modern tax structure, the more catching up we're going to have to do. And that's certainly not good for business.
Nell Levin is a longtime activist and a concerned citizen. She can be reached at email@example.com.