TN Has a Fiscal Slope Even Without a Fiscal Cliff

While national attention is riveted on Washington’s walk toward a fiscal cliff and the various steps backward, forward and sideways along the path, the matter is receiving some Tennessee attention because of the potential ramifications for the state and local governments.
On the spending-cut side of the fiscal cliff, projections are that Tennessee’s immediate loss of direct federal funding would be fairly modest by governmental standards, about $100 million by most estimates.
The tax increase side of the cliff could have a more substantial, though less immediate, impact. The President’s Council of Economic Advisers calculates, for example, that the increased payment of federal income taxes would translate into about $4 billion less in retail spending by Tennesseans in a year.
A day before that estimate was sent to the media last week, Stan Chervin, a state Department of Revenue veteran who serves as a consultant on state tax matters, spoke to the Tennessee Advisory Commission on Intergovernmental Relations in general terms on how the cliff’s increase in federal income and payroll taxes — actually the elimination of current tax breaks — translates into less disposable income: “All those things are going to reduce take-home (money) if they go away, and that’s what we use to buy stuff. And that’s how we run the state.”

Fifty-four percent of Tennessee’s revenue comes from sales taxes, which are levied at 7 percent on the state level and up to 2.75 percent at the local government level. Each $1 billion reduction in taxable consumer spending thus translates into something close to $97.5 million in lost sales tax revenue for the state and local governments combined.
And, of course, the reduced consumer spending has a secondary impact — the reverse of those economic studies you see projecting all sorts of growth because of a new industry’s investment or some such. Reduced spending means reduced employment in secondary businesses, especially retail, which means further reduced spending, etc.
So, fiscal cliff spending cuts and tax increases are both bad from the perspective of Tennessee state and local government revenues — but federal tax increases are worse.
On the other hand, there’s what might be called the property tax fiscal slope faced by local governments, which was also discussed by Chervin at the TACIR gathering last week.
The basic problem: Property values have been declining in Tennessee since the 2008 recession kickoff, reversing a decades-long trend. Local governments depend heavily on property taxes, which are subject to reappraisal every four years. For the state’s four biggest counties, including Knox, reappraisal is next year.
Traditionally, property values rise steadily, so reappraisal has meant that if tax rates remained the same, owners would be paying more taxes. Governments then have to lower rates so they don’t receive a windfall because of the higher appraisals.
Ah, but with property values down, reappraisal would next year instead mean rates would have to go up for the taxes paid to remain the same. The situation varies from county to county, of course, but Chervin says that will be the case in most counties, including the “big four.”
Raising tax rates is a fiscally responsible thing to do in such a case. It is also about as politically popular as venereal disease or a state income tax. So while U.S. Sen. Bob Corker has been getting attention for retreating from a past pledge against tax increases, local politicians may soon be getting attention for making a decision that not all revenue enhancement is the same evil.
Tax aversion also figures into some issues pending before the 2013 legislative session. Last week, a Senate subcommittee held hearings on a proposal to require companies that book hotel and motel reservations for customers online to pay hotel-motel taxes.
Businesses that operate hotels and motels, which are already paying the taxes, think that the legislation being proposed by Sen. Doug Overbey and Rep. Art Swann, both Maryville Republicans, amounts to closing a loophole. The online companies just say it’s a tax increase. And that, in today’s political environment, could be enough to stop the idea cold.
Then again, maybe new taxing times are at hand. Legislators and local officeholders can look to Corker for guidance.

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