Gov. Bill Haslam tells the Chattanooga TFP that ending the state’s inheritance and gift tax will generate more money for Tennessee than what it will cost the state’s tax coffers. The Tennessee Legislature this year voted to phase out the state’s inheritance and gift taxes. The Volunteer State was one of 19 states that taxed estates. Connecticut is the only other state to impose a state tax on gifts.
“Ending the inheritance tax will leave more capital in the state, and the more capital we can get to come or stay in our state the better it will be for Tennessee,” Haslam told reporters and editors at the Chattanooga Times Free Press. “I do think we’re headed in the right direction in Tennessee, and I feel very good about where we are competitively among the states.”
The Tennessee Department of Revenue estimates the state will lose an estimated $104.1 million in revenue annually when the inheritance tax is fully eliminated by 2016. The gift tax will end July 1, costing the state about $15 million a year.
But Haslam said ending such taxes should encourage more wealthy people to reside in Tennessee and not flee to other states that don’t impose such taxes. Dr. Arthur Laffer, a former economist for the late President Ronald Reagan, estimates Tennessee’s economy would have been 14 percent larger with 200,000 more jobs had the state not had an estate tax and more wealthy individuals lived in Tennessee.
Already, developers such as the Tennessee Land and Lakes are touting the repeal of the state’s estate tax in their marketing appeals to seniors to buy properties on Tellico Reservoir.
News release from governor’s office:
HUMBOLDT – Tennessee Gov. Bill Haslam today traveled to Luckey Family Farm in Humboldt to highlight the second of three tax cuts passed during this year’s legislative session and signed by the governor.
Haslam held a ceremonial bill signing of HB 3760/SB 3762, which phases out the state inheritance tax during the next three years before it is completely eliminated starting January 1, 2016.
The bill was introduced by the governor as the state continues its work toward providing the best customer service at the lowest possible cost to Tennesseans.
“We’re focused on making state government more efficient and more effective while reducing the cost to taxpayers,” Haslam said. “Jobs are created when people invest capital. The inheritance tax is causing Tennesseans to take their capital to other states as they grow older, but businesses and family farms can’t pick up and leave. Eliminating this tax will ease the burden on family businesses and farms that are left to other generations.”
The exemption level will be lifted to $1.25 million in 2013; $2 million in 2014; and $5 million in 2015.
Haslam included $14.2 million in the FY 2012-2013 state budget to fund the legislation.
In Whitwell Monday, the governor signed HB 3761/SB 3763, legislation reducing the state portion of the sales tax on groceries from 5.5 percent to 5.25 percent. His plan is to reduce it next year to 5.0 percent.
The Senate passed and sent to Gov. Bill Haslam Friday legislation abolishing Tennessee’s inheritance tax and lowering the sales tax on groceries.
Legislative leaders, meanwhile, said they will also back passage of a third bill that would repeal the state’s gift tax. Haslam has said he supports that move as well.
The bill providing a phased-in elimination of the inheritance tax, HB3760, passed the Senate 32-1. The House had approved earlier, 88-8.
As approved, the bill calls for raising the current exemption for the inheritance tax from $1 million to $1.25 million this year and increase the exemption annually until 2016, when the tax would be eliminated entirely.
The sole no vote in the Senate came from Sen. Roy Herron, D-Dresden, who had attempted to amend the bill to block the final step, leaving the exemption at the scheduled $5 million level for estates of those dying in 2015.
FedEx President, Chairman and CEO Fred Smith said today that economist Arthur Laffer must have misunderstood him last week in Memphis because Smith said he’s “never taken a position” on Tennessee’s estate tax and has no plans to leave Tennessee.
From the Rick Locker report: Smith, founder of FedEx, responded today to public remarks made Monday by Laffer to a state legislative committee during Laffer’s testimony in support of legislation to phase out Tennessee’s inheritance and estate tax by 2016. Laffer is a leader in the lobbying effort to pass the bill and made a 25-minute talk to the House-Senate Fiscal Review Committee Monday in support of the bill.
Laffer gained fame as a supply-side advocate in the administration of former President Ronald Reagan and moved a few years ago from California to Nashville, where he is chairman of Laffer Associates, a consulting firm. He dropped several names during his presentation Monday, including Reagan and California anti-tax activist Howard Jarvis.
At one point, in response to a question about the economic impact on the state of repealing the inheritance tax, Laffer said: “I spent about two hours with Fred Smith three days ago up in Memphis, and he said he’s gettin’ out of this state if it doesn’t happen. And now we don’t want to lose FedEx. Fred Smith’s a couple of classes behind me at Yale and he’s a good friend.”
FedEx on Monday night said the company doesn’t comment on Smith’s personal matters. But Smith issued a statement today saying Laffer must have misunderstood him.
Economist Arthur Laffer urged Tennessee lawmakers on Monday to follow up repeal of the state inheritance tax — a bill that has already assured of passage — with a cut to the state’s tax on gifts, which he said curbs economic growth.
From Chas Sisk’s report: Laffer told the legislature’s Joint Fiscal Review Committee that the state’s gift tax should be eliminated immediately. The Nashville-based economist has been pushing for repeal of Tennessee’s estate and gift taxes, which he says cause rich retirees to move to states where they can pass on their wealth to heirs tax-free.
“Tennessee’s performance has been very poor, and the reason it’s been poor in my view … is because of the gift and estate tax,” he said. “You’re taking that very small group of people, the crème de la crème of the job creators, and forcing them to leave. By doing that, you’ve really held down the growth rate.”
….Laffer told lawmakers Monday that they should continue with repeal of Tennessee’s gift tax, which kicks in whenever a Tennessee resident gives a family member goods and cash worth more than $13,000 in a year or a nonrelative more than $3,000. The tax starts at 5.5 percent, tops out at 16 percent, and brings in about $15 million a year.
House Finance Committee Chairman Charles Sargent, who has filed legislation to repeal the gift tax, indicated he would like to pursue the idea. Speaking as if a gift-tax repeal were a foregone conclusion, Sargent, R-Franklin, asked Laffer when the state would see the benefit.
News release from House Republican Caucus:
NASHVILLE, Tenn.–The pocketbooks of all Tennesseans are getting help from the Legislature with the passage of two major tax cuts.
The House of Representatives today overwhelmingly approved the repeal of the death tax and the reduction of the food tax on two separate votes. Both bills have long been a major priority for many Members of the House Republican Caucus who believe the bills will help taxpayers keep more of their hard-earned money and place Tennessee on better economic footing.
“This is a landmark moment for Tennesseans,” stated House Speaker Beth Harwell (R–Nashville). “We believe, when government revenues are higher, that money doesn’t belong to the State but to taxpayers and should be returned to them immediately. Our Republican Majority was placed here to balance the budget, cut wasteful spending, and lower taxes. Today we carried through on that promise.”
Representative Charles Sargent (R–Franklin), who guided the death tax repeal to full House passage, remarked, “Today is an exciting day. We looked at the numbers, rolled our sleeves up, and worked with Governor Haslam to come up with two bills that will really benefit all Tennesseans. The repeal of the death tax is especially noteworthy because it will help convince the job creators in our State to remain here and help grow our economy. This doesn’t benefit one group; it benefits any Tennessean who is concerned about job growth.”
House Bill 3760, the death tax repeal, phases out the death tax over the next four years, to a complete repeal by 2016. House Bill 3761, the food tax cut, lowers the sales tax rate on food from the current 5.5% to 5.25%, the steepest reduction in many years.
The food tax cut was the responsibility of Representative David Alexander (R–Winchester). Following the final vote on the bill Alexander stated, “This wasn’t a partisan move, it was a move to help every Tennessean. The Governor asked to work with us on lowering the food tax and this is the product of that hard work. It’s something we all can be proud of.”
House Majority Leader Gerald McCormick (R–Chattanooga) added, “It has long been a principle that Republicans believe limited government is best. You do that by cutting taxes and ensuring Tennesseans keep more of the money they earn. In turn they will invest that money, the economy will grow, and new career opportunities will emerge.”
“These tax cuts are proof of our motto: It matters who governs,” concluded Representative Debra Maggart (R–Hendersonville) who serves as the Republican Caucus Chairwoman. “A recent study shows a repeal of the death tax ten years ago would have grown our economy an additional 14%. While the previous generation of leadership failed to take action, this generation of Republican leadership is committed to charting a new path that creates jobs and limits government.”
The bills are now sent to the Senate for action which is expected to come in the next week.
By Erik Schelzig, Associated Press
NASHVILLE, Tenn. — The House voted on Thursday to begin phasing out Tennessee’s inheritance tax and to lower the state’s sales tax on groceries.
The chamber voted 88-8 on the estate tax measure, and 96-0 to cut the food tax from 5.5 percent to 5.25 percent.
Republicans hailed the estate tax cut as a way to keep retirees from moving out of state, while Democrats argued that the tax cut on groceries affects a far larger number of people. Both measures were part of Republican Gov. Bill Haslam’s legislative agenda this year.
In a March 24 editorial, the Wall Street Journal declared Gov. Bill Haslam “the main obstacle to reform” of Tennessee’s inheritance tax. Now Haslam has replied with a letter to the editor of the publication that appears under the headline, “I’m Not the Problem on Death Tax Reform.” The governor has, of course, now embraced the idea of complete repeal of Tennessee’s inheritance tax.
Here’s an excerpt from the editorial: A November 2011 study of tax return data by economists Arthur Laffer and Wayne Winegarden shows how people avoid state death taxes. The study compared Florida and Tennessee high-income returns. Both states have no income tax, but Tennessee is one of only two states that imposes an estate and a gift tax. (Connecticut is the other.)
The authors point out that this year there is a $5 million exemption on the federal estate tax and gift tax (a once-in-a-lifetime wealth transfer for the living), but in Tennessee the exemption is a meager $13,000 for estates and gifts. With a gift and death-tax rate that reaches 9.5%, a Tennessean with a $5 million estate would pay $462,000 more estate tax than someone living in the 29 states with no such tax, such as Florida. Tennessee is a very expensive state to die in.
The Tennessee tax really does cause the rich to flee. The authors found that in 2010 Florida had nearly twice as many federal tax returns with taxable estates (per 100,000 population) as did Tennessee. The average estate is also larger in Florida–$7.4 million versus $4.4 million in Tennessee.
Here’s the kicker: Because wealthy people avoiding the estate tax take their businesses and spending with them, the study concludes that “had Tennessee eliminated its gift and estate tax 10 years ago, Tennessee’s economy would have been over 14% larger in 2010.” They also find the estate tax cost Tennessee state and local governments over $7 billion in tax collections. Could there be a more self-defeating tax?
The main obstacle to reform in Nashville is GOP Governor Bill Haslam, who earlier this year acknowledged damage from the tax, saying “There’s a whole lot of people who used to live in Tennessee who don’t anymore because it’s cheaper to die in Florida.” But he now says the state needs the revenues, however imaginary they might be. This mistaken logic is also being used to block repeal in Nebraska.
Here’s the Haslam letter: Regarding your editorial “Death Tax Defying” (March 24): In early January I proposed legislation to raise the exemption level on Tennessee’s estate tax from the current rate of $1 million to the federal exemption level of $5 million during my time in office. (Note: Actually, the bill did not originally raise the exemption level to $5 million, though the governor declared that as a goal.)
Just last week, I cemented that proposal by recommending doing so in the next three years and worked with House Finance Committee Chairman Charles Sargent to completely repeal the tax in year four.
This is a thoughtful and realistic approach to eliminate a tax that chases capital out of our state as Tennessee slowly recovers from the economic downturn that we continue to carefully manage our way through.
Tennessee is a low-tax state, and I’m working with the General Assembly to lower taxes even further.
News release from House Speaker Beth Harwell:
(March 21, 2012, NASHVILLE) – Speaker Beth Harwell (R-Nashville) today praised House Finance, Ways and Means Chairman Charles Sargent (R-Franklin) for his leadership and hard work to repeal the state’s death tax. House Bill 3760 passed House Finance, Ways and Means Subcommittee and will be heard in the full committee in the coming weeks.
“Without the leadership of Chairman Sargent, this full repeal of the death tax would not have been possible,” said Speaker Harwell. “I appreciate his passion for this issue. We know this tax drives people, capital, and jobs out of the state. We know this tax splits up family farms that have been in the family for generations. I commend everyone’s hard work on this very important issue.”
The bill has been amended to now include a full repeal, with the death tax phasing out gradually over the next four years. By 2016, the tax will be completely eliminated. Tennessee is one of only two states in the south with a death tax.
“I want to thank my colleagues for their hard work and support for this bill,” said Chairman Sargent. “The House Republican Caucus made repealing the death tax a priority this session because we know it will help family owned farms and small, family owned businesses operate with certainty. I look forward to continue moving it through the committee system.”
Gov. Bill Haslam has proposed to incrementally lower both the Tennessee sales tax on groceries and the state inheritance tax as part of a package of 55 bills his administration will push in the legislative session that began Tuesday.
Other highlights of the legislative package as outlined by Haslam at an afternoon news conference would:
-Overhaul “antiquated” rules and laws for hiring, firing and paying state employees. Haslam said the changes would “simplify” the hiring process, change the method of laying off workers and “streamline” the appeals process for workers who believe they were fired or disciplined illegally.
-Change laws that set teacher salaries on the basis of seniority and training so local school districts will have “flexibility to make decisions such as how to address hard to staff schools or subjects along with rewarding teacher performance.”
-Eliminate average class size requirements in schools, though there would still be a limit on the maximum number in any given class, varying by grade levels.
-Increase the amount of direct cash grants given to businesses that locate or expand in Tennessee, though declining to give a figure at this point on how much money would be involved. The cash would be provided “only in exceptional cases” providing jobs to Tennesseans, Haslam said.
-Restructure 22 state boards and commissions, including the Tennessee Regulatory Authority. The TRA, which now has four full-time directors and no executive director, would instead have five part-time commissioners and an executive director, who would be appointed by the governor.
-Require that the executive director of the Tennessee Higher Education Commission answer to the governor rather than the THEC board. Haslam said he thinks the governor, who appoints the commissioner of K-12 education, should have the same authority over the agency that oversees higher education at the University of Tennessee and the Board of Regents.
On the tax bills, Haslam is effectively backing both a call from House Speaker Beth Harwell for reducing the state’s inheritance tax and backing a call from Democratic legislators for reducing the sales tax on food. Lt. Gov. Ron Ramsey, meanwhile, has been calling for reduction of the Hall income tax on dividends and interest – a move that is not part of the Haslam plan.
Tennessee’s inheritance tax now applies to estates of $1 million or more. Haslam said his bill will raise that exemption to $1.25 million in the coming year, resulting in a loss of about $15 million of state revenue. His long-range plan, the governor said, is to raise the exemption level over a five-year period to $5 million, which is the current level of the federal estate tax exemption.
The state sales tax on grocery food is currently 5.5 percent, already lower than the general state sales tax of 7 percent — though local governments may add up to 2.75. Haslam proposes to lower the rate to 5.3 percent effective July 1, costing the state about $18 million in lost revenue. The governor said he push to lower the state tax groceries to 5 percent in steps over the following two years, providing tax relief that will “benefit every Tennessean.”
The governor said Tennessee’s inheritance tax is now higher than most other states, prompting “a whole lot of people” to leave the state as they age.
“It’s cheaper to die in Florida,” he said, predicting that, in the long term, a $5 million exemption will mean more overall tax revenue for the state.
Haslam said the grocery tax reduction is “the only way to really touch every Tennessean in a significant way.”
“So we felt like it was important to do both at the same time,” he said.
Harwell and House Democratic Leader Craig Fitzhugh both praised the tax-cutting plans. Ramsey, who was attending a hearing on Senate redistricting, did not attend.
Haslam said he is sympathetic to cutting the Hall income tax, but there is a need to balance that with the state’s need for revenue.
The governor insisted his proposed change of civil service rules would not mean a return to the patronage system of bygone days in Tennessee politics. Currently, state employees are in two categories – those covered by civil service who can be dismissed only under specified circumstances and those in “executive service,” who may be fired at will.
Haslam said only 15 percent of executive service employees who served in the Bredesen administration that have left state government.
The 55-bill package compares to just 24 bills last year from the governor, who has indicated plans to take a more assertive role in the 2012 session. NOTE: News release below