posted December 30, 2004
The final report of the Tennessee Tax Structure Study Commission calls for a state income tax.
The report says the state sales tax is too high and there is inequity in other parts of the state's fiscal system.
The Commission, formed by legislative action in July 2002, used 75% of its allocated budget. The remainder will be absorbed into the State's General Fund.
The Commission held more than 41 meetings and listened to over 100 presentations over an almost two-year period.
The report was delivered to Gov. Phil Bredesen, who has not indicated he would move toward a state income tax.
The report is described as a "comprehensive study of the entire tax system in terms of soundness, fairness, equity, and deductibility for all Tennesseans."
The report and recommendations are guided by nine Principles of a High-Quality Revenue System, as outlined by the National Council of State Legislatures, officials said.
The report says, "Based upon careful consideration of substantial testimony regarding the current status of the state and local tax structure in Tennessee, the Tax Structure Study Commission made the following principle findings and recommendations:
1. The sales tax rate is too high, regressive, and has an anti-competitive effect. Accordingly, the sales tax rate should be reduced.
2. The franchise tax rate is too high, and has an anti-competitive effect. Accordingly, the franchise tax rate should be reduced.
3. The property base of the franchise tax results in double-taxation, and has an anti-competitive effect. Accordingly, the property base of the franchise tax should be repealed.
4. The Hall income tax is unfairly selective, and is particularly harmful to retirees with limited income derived mainly from investments. Accordingly, the Hall income tax should be repealed.
5. Local governments should be held harmless for recommended changes in the State's tax structure.
6. The size of State tax-funded State government should be limited to a percentage of the State's overall economy.
7. In the interest of taxpayer fairness, tax appeals should be subject to independent review, and the pay-to-play rules should be eliminated.
After careful consideration, the Commission presented a proposal to introduce a graduated rate tax on personal income in order to address the above findings and to achieve its recommendations.
Executive Summary The Commission was composed of 19 voting and five non-voting members. It convened for more than 40 meeting days in 2003 and 2004. The Commission sought to determine the structural adequacy of the tax system and not the adequacy of expenditures.
The Tennessee General Assembly created the Tax Structure Study Commission to conduct a comprehensive study of the entire system of taxation in Tennessee. Pursuant to Public Acts 2002, Chapter No. 856, Section 12, the Commission’s primary charge was to evaluate the Tennessee tax system in terms of soundness, fairness, equity, and deductibility, and, if appropriate, to recommend changes to the Tennessee tax code in order to enhance the soundness, fairness, equity, and adequacy thereof. At the heart of this charge was making the Tennessee tax system competitive with surrounding states, and promoting balance, stability, and elasticity in the Tennessee tax system.
In approaching its charge, the Commission determined that it was established to examine the adequacy of the tax structure in terms of competitiveness, fairness, and revenue stability, and not the adequacy of expenditures on services set forth in the State budget. In the opinion of the Commission, adequacy of expenditures is a matter left to the Tennessee Legislature, the Governor, and ultimately the people. Accordingly, the Commission made no judgment concerning the sufficiency of government spending, and limited itself to a single question: Is there a tax system in place sufficient to raise revenue meeting the State's needs, as determined above, without sacrificing competitiveness, fairness, and revenue stability?
In order to meet its charge in an efficient and cost effective manner, the Commission divided its work into three phases.
In Phase One, the Commission evaluated every aspect of the present tax structure, and examined the development of the current structure from a historical perspective. The primary step in this evaluation consisted of gathering present and historical data regarding taxation and economics in Tennessee and surrounding states. In addition to this valuable data, the 18 several experts noted that the current tax system encourages Tennesseans to make taxable retail purchases out-of-state, resulting in reduced Tennessee revenues and budget stress.
Commission gathered input from more than 100 tax experts and concerned citizens from across Tennessee and the nation who presented their ideas over the course of more than 40 meeting days.
In Phase Two, which somewhat overlapped with Phase One, the Commission sought input on what the structure could be, if we started from scratch and if there were no legislative, legal, or existing tax code constraints.
In Phase Three the Commission combined the current structure analysis from Phase One with the creative critical thinking of Phase Two to determine the most effective path for Tennessee to take in the future.
The Commission’s work revealed the following problems:
• The current tax structure is anti-competitive. This makes it particularly difficult to retain individuals and businesses currently located, or doing business, in Tennessee, and to attract new individuals and businesses to move to, or do business in, Tennessee.
• The Tennessee sales tax rate is too high. The average combined state and local sales tax rate is significantly higher than surrounding states, resulting in a steady increase in the incidence of border leakage and Internet and mail order purchases. When Tennessee citizens make cross-border purchases, they subsidize government services in other states. In effect, money that would have benefited programs for Tennesseans instead funds programs in neighboring states.
• The sales tax base is eroding. Factors contributing to this erosion include the increasing share of services in consumer spending, increased opportunities for purchases via the Internet or mail order, and lower sales tax rates in bordering states. These factors have resulted in taxable retail sales growing more slowly than the economy as a whole over the last three decades.
• The current structure lacks balance and stability. State revenues are overly reliant on the sales tax, causing revenue growth to lag behind economic growth.
• The current structure is inelastic. The State’s General Fund revenues have grown more slowly than the economy over the past 30 years, excluding tax base and rate.
With crisis inherent in the system, Tennessee's tax structure has been described as unsafe at any speed. The Commission adopted a position of revenue neutrality.
This same finding was made by two other Tennessee tax structure reform commissions in 1974 and 1985.
• The current tax structure is too regressive. Tennessee's low- and middle- income families bear a higher proportional tax burden than high-income households. This same finding was made by two other Tennessee tax structure reform commissions in 1974 and 1985.
• The business franchise tax discourages capital investment and expansion in Tennessee. The franchise tax is particularly onerous for companies with capital-intensive operations and start-up companies.
• The narrow tax base yields high tax rates. Under the present system, an economic downturn increases pressure to raise tax rates on a narrow base.
Although the Commission found that Tennessee is not currently at a crisis point, national experts have told the Commission that the time will come again when the current tax structure will fail to meet the State’s needs due in large part to a lack of elasticity. Accordingly, while the current fiscal climate appears less turbulent than years prior1, the Commission determined that, based upon a variety of factors including the anti-competitiveness and inelasticity of the current tax structure and uncertainty resulting from potential events beyond the Legislature's power to control, Tennessee will likely face critical revenue problems in the near future.
Based upon its findings, the Commission determined that the current tax structure is seriously flawed, and that the implementation of a program of total tax reform is necessary to enhance the competitiveness, fairness, and revenue stability of the Tennessee tax structure. The Commission further determined that any such program of reform could be revenue neutral and still meet the State's revenue requirements as long as the new tax structure broadened the tax base and reduced rates.
1 Although FY 2003-04 revenue collections were approximately $380.3 million ahead of projections, FY 2004-2005 projected revenue collections were behind by approximately $100 million as of December 2004. Department of Finance & Administration (report Aug. 13, 2004) and Funding Board (report Dec. 2004). Page 10 of 118
The Commission made the following recommendations:
1. Reduce the general State sales tax rate to 6%, and eliminate the general local option sales tax. This would reduce the overall general state and local sales tax rate from a maximum of 9.75% to 6 percent.
2. Reduce the State sales tax rate on grocery food to 4%, and eliminate the local option sales tax on grocery food. This would reduce the overall state and local sales tax rate on grocery food from a maximum of 8.35% to 4 percent.
3. Repeal the Hall income tax.
4. Eliminate the property basis of the business franchise tax, and reduce the rate by 50% to $0.125 per $100 of assessed value.
5. Implement a local "hold harmless" provision such that local governments are not harmed by the recommended changes.
6. In fairness to taxpayers, introduce an independent review of all tax appeals, and eliminate pay-to-play requirements for tax appeals.
7. Limit State tax growth.
These recommended changes to the state and local tax structure are expected to reduce revenue by more than $3 billion. Recognizing that the imposition of tax is limited to sales, property, and income, the Commission considered a variety of possible methods of offsetting this change in revenue, including, but not limited to, the enactment of numerous modified consumption taxes, a pure value added tax, a single-rate exchange tax, a health care provider tax, a business entity tax, an intangible property tax, a wealth equity tax, gas tax increases, a single-rate sales tax, a dramatically broadened sales tax on services, a personal income tax, a statewide motorized item registration tax, and a statewide real property tax.
After reviewing substantial testimony regarding non-traditional tax options such as a value added tax, the Commission determined that the enactment of any taxes that did not correspond in some manner to the taxes imposed by bordering States would be anti-competitive and difficult to administer. Accordingly, after much debate and careful consideration, the Commission narrowed the discussion to two alternative proposals.
In regard to Proposal One, the Commission considered the enactment of a broad based personal income tax with a graduated rate ranging from 3.5% to 6%, a $15,000 exemption for single filers, a $2,000 deduction per dependent, and a credit against professional privilege tax for the amount of income tax paid. It is anticipated that implementation of Proposal One would generate approximately $3 billion in revenue.
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In regard to Proposal Two, the Commission considered the enactment of a statewide personal property tax on motorized, registered items (e.g. boats, autos, motorcycles, airplanes, etc.) with an average assessment of $100 per item, and a statewide tax on real property at a rate of $2.60 per $100 of taxable value. It is anticipated that implementation of Proposal Two would generate approximately $3 billion in revenue.
The Commission concluded that, while neither proposal would completely ensure that Tennessee would be free from budget crisis, Proposal One improved the State's competitive position relative to neighboring states. Furthermore, Proposal One better addressed the guiding principles of a high quality state revenue system in terms of balance, stability, elasticity, and equity. Taxing the broadest possible base at the lowest possible rates allows Tennessee to meet economic fluctuation with revenue raising flexibility. Accordingly, the Commission recommended the tax reductions and eliminations listed above in combination with a broad based graduated rate tax on personal income, which will generate the funds to achieve the Commission's recommendations and offset associated revenue impact.
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Mission and Members
Mission
Between 1999 and 2002, Tennessee suffered from significant revenue shortfalls due to the recession that came in the wake of the downturn in the economy. Faced with a choice between increasing the sales tax rate and cutting State services, the Tennessee Legislature fended off a tax hike by trimming numerous services from the budget, using one-time tobacco settlement funds, raiding the Rainy Day fund, draining capital project reserve funds, canceling or postponing capital improvements at State buildings, reducing allocations to higher education institutions which resulted in higher tuition rates, and withholding pay raises and reducing benefits for State employees. In response, Tennessee's bond rating dropped significantly, resulting in higher capital costs for bonded projects and reduced capital investment in Tennessee's future.
In July 2002, with more revenue shortfalls on the horizon and nowhere left to turn for a quick infusion of funds, the Tennessee Legislature passed a $933 million tax package. The act included the largest tax increase in the history of Tennessee, and gave the State the distinction of having the country’s highest state sales tax rate2.
The Tax Structure Study Commission was formed as part of the 2002 tax package. The Commission was charged with conducting a comprehensive study of the entire tax system in terms of soundness, fairness, equity, and deductibility for all Tennesseans, and, if appropriate, to recommend changes to the Tennessee tax code in order to enhance the soundness, fairness, equity, and adequacy thereof. To meet this charge, the Commission was expected to make recommendations that would improve the Tennessee tax system's competitiveness with surrounding states, and promote balance, stability, and elasticity in the Tennessee tax system. However, the Commission did not make judgments concerning the sufficiency of government spending, but instead limited itself to considering whether the tax system was sufficient to raise revenue meeting the State's needs, whatever they may be, without sacrificing competitiveness, fairness, and revenue raising stability.
2 Federation of Tax Administrators, April 2003 presentation to Commission. Page 13 of 118
Specifically, the Commission was charged with examining the following types of taxes:
• State taxes;
• Local taxes;
• Special district taxes; and
• State-shared taxes.
Further, the Commission was charged with studying the following:
• Tax elasticity;
• The effect of E-commerce on the tax structure; and
• State tax revenue allocation methods with particular emphasis on the tax effect of basing allocation on situs of collection, revenue distribution formulas, population, and tourism.
Additionally, the Commission was charged with studying the following general issues:
• The exportability and federal deductibility of state and local taxes;
• Whether State tax rates should be tied to average tax rates subject to retaliation; and
• Tax leakage to states bordering Tennessee.
Finally, the Commission was charged with examining the following business-specific tax issues:
• How Tennessee business taxes compare to the business taxes imposed by bordering states;
• Fairness of business taxes;
• Business tax revisions needed due to the economic shift from manufacturing to service industries;
• Whether consolidated filing should be required for franchise and excise tax;
• Whether current allocation formulas fairly apportion income and losses; and
• If, and to what extent, a business entity's form should help determine exemption from State taxes.
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Members
Three officials – then-Governor Don Sundquist, Lieutenant Governor John Wilder, and House Speaker Jimmy Naifeh -- appointed members to the Commission in January and April 2003. These appointments were made based upon the recommendations of constituent groups.
The Commission was comprised of appointed citizens representing the following constituent groups: tax attorneys, agriculture, business, insurance, hospitals, labor, bankers, CPAs, chambers of commerce, insurance, AARP, families, State employees, and city and county governments. There were five non-voting advisory members who represented higher education institutions from across the State. No Commission members concurrently held an elected legislative office at the State level.
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Methodology
In order to meet its charge, the Commission divided its work into three phases.
Phase 1: The Current Structure The Commission solicited comment from various sources to understand the perception that the tax system is inferior to the majority of other states in terms of competitiveness, elasticity, and regressivity.
The initial stage of the Commission's work took the form of evaluating tax and economic data and input from a variety of tax administrators, economists, local officials, business leaders, and representatives from other State tax structure study commissions to better understand Tennessee's current structure. The goal was to study the current structure and understand the history of the current system. In addition, the Commission solicited comment from national organizations that rate state tax systems in order to understand why Tennessee typically receives poor marks in state tax and economic ratings concerning competitiveness, elasticity, and regressivity. Most rated the current tax system between 3 and 5 on a 10-point scale in these regards.
Given that the Commission was comprised of 19 voting and five non-voting members with very different backgrounds, and only a third or so with significant amount of tax experience, it took a significant amount of time to understand the complexities of the current system and the impact potential changes might have in Tennessee.
All totaled, the Commission received input from over 100 tax experts and concerned citizens from across Tennessee and the nation who presented their ideas over the course of more than 40 meeting days.
Phase 2: The Magic Wand
The second stage included the types of speakers in Phase One, but asked presenters how they would positively change the tax structure. When appropriate, presenters were handed the "magic wand" and asked to describe their version of how to structure Tennessee's tax system if they could wave a magic wand and start from scratch.
Page 16 of 118 The Commission narrowed reform options based upon the principles of competitiveness, elasticity, and regressivity.
It was during this Phase that the Commission held meetings outside of Nashville to hear perspectives from other communities across the State. Input from border communities (particularly metropolitan and major population areas such as Memphis, Chattanooga, Tri-Cities, and Clarksville) was extremely important because the State’s high sales tax rate impacts buying behavior for Tennesseans who cross the State border to avoid the high tax rate.
The Commission also opened the floor to advocacy groups, local businesses, industry groups, and local government officials to discuss strengths and weaknesses in the Tennessee tax structure, and to give them opportunities to recommend positive change. Through these sessions, the Commission gave careful consideration to presentations recommending the enactment of numerous modified consumption taxes, a pure value added tax, a single-rate exchange tax, a statewide real property tax, a statewide motorized item registration tax, a health care provider tax, a business entity tax, an intangible property tax, a wealth equity tax, gas tax increases, a single-rate sales tax (with concurrent repeal of all other taxes), and a dramatically broadened sales tax on services. Many of these proposals were rejected because they did not improve competitiveness, enhance elasticity, or reduce regressivity in the Tennessee tax structure. However the statewide real property tax, the statewide motorized item registration tax, the broadened sales tax on services, and the broad based personal income tax did receive further consideration.
Phase 3: Assimilation and Discussion
The third stage of the Commission’s work took input from the earlier phases and developed building blocks from which the Commission’s final recommendations were built.
During this phase the Commission agreed on the following:
• To enhance competition with bordering states and improve tax elasticity and fairness by broadening the tax base and lowering rates;
• To enhance competition with bordering states and improve tax fairness by reducing the franchise tax rate to a reasonably competitive level when compared to Tennessee's border states, and eliminating the double-taxation inherent in the property base of the franchise tax; and
• To keep recommendations revenue neutral.
Page 17 of 118 The golden rule of tax reform is simple: broaden the base and reduce rates.
Further, the Commission adopted guiding principles when reviewing options to improve the State’s competitiveness, elasticity, and fairness. The Principles of a High-Quality State Revenue System, provided by the National Conference of State Legislators, served as a framework for discussions as members of the Commission deliberated on positive changes to the current tax structure. These nine principles are listed below:
1. A high-quality tax system comprises elements that are complementary, including the finances of both State and local governments.
2. A high-quality tax system produces revenue in a reliable manner. Reliability involves stability, certainty, and sufficiency.
3. A high-quality tax system relies on a balanced variety of revenue sources.
4. A high-quality tax system treats individuals equitably. Minimum requirements of an equitable system are that it imposes similar tax burdens on people in similar circumstances, that it minimizes regressivity, and that it minimizes taxes on low-income individuals.
5. A high-quality tax system facilitates taxpayer compliance. It is easy to understand and minimizes compliance costs.
6. A high-quality tax system promotes fair, efficient, and effective administration. It is as simple as possible to administer, raises revenue efficiently, is administered professionally, and is applied uniformly.
7. A high-quality tax system is responsive to interstate and international economic competition.
8. A high-quality tax system minimizes its involvement in spending decisions and makes any such involvement explicit.
9. A high-quality tax system is accountable to taxpayers.
Finally, the Commission agreed upon definitions of the terms "adequacy," "elasticity," and "regressivity" for the purpose of analyzing Tennessee's tax structure.
Broadening the Tax Base and Reducing Rates
There’s no doubt that Tennessee’s current tax structure has difficulty living up to the standard set by the Principles of a High Quality State Revenue System which states: “A high-quality revenue system relies on a balanced variety of revenue sources.” With more than 63% of the State’s revenue coming from the sales tax, Tennessee’s revenue sources hardly achieve balance. This lack of balance is
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particularly problematic given the increasing share of non-taxable services in consumer spending, increased opportunities for making purchases via the Internet or mail order, and ease of travel coupled with lower sales tax rates in bordering states.
The sales tax provides the majority of State revenue, but the base is eroding. In response, Tennessee has steadily increased the sales tax rate, further eroding the base with an anti-competitive effect on individual and business purchasing decisions. The cost of going out-of-state to make purchases is significantly less than Tennessee sales tax saved, which encourages Tennesseans to make their purchases elsewhere. Similarly, Tennessee sales tax is cost prohibitive, which discourages non-Tennesseans from making purchases in Tennessee. Essentially, because of the current tax structure, Tennessee citizens are subsidizing other states and supporting government programs in other states to the detriment of Tennessee.
In order to relieve the lack of balance and anti-competitiveness of the current tax structure, Tennessee should reduce tax rates. However, such a reduction should be expected to result in a loss of revenue. To maintain revenue neutrality while reducing rates, the tax base must be broadened either by eliminating deductions, credits, and exemptions; enacting new taxes that do not reduce competitiveness; or a combination of both.
Reducing the Franchise Tax Rate and Eliminating Double-Taxation
The structure of the franchise tax system conflicts with the seventh principle of the Principles of a High Quality State Revenue System which states: "A high-quality revenue system is responsive to interstate and international economic competition." Tennessee is rapidly becoming less competitive regionally in drawing and retaining businesses. Franchise tax makes up about 6% of Tennessee’s revenue, as shown in Figure 1 below. The franchise tax’s current structure makes it difficult for Tennessee to compete with neighboring states in drawing and retaining businesses. Many companies do not have substantial net worth during start up phases due to losses, but they still have to pay Tennessee’s franchise tax due to the net book value of their property. North Carolina is the only border state with a property base component to their franchise tax similar to Tennessee’s. However, North Carolina's franchise tax rate is 60% less than Tennessee's, and, therefore, the impact of double-taxation via the property base is much reduced.
Job credits against franchise tax partially offset the competitive disadvantage of the property base component for manufacturing and distribution companies. Many startup and service businesses do not qualify for franchise tax job credits. However, these credits could be in danger due to a decision recently rendered by the Sixth Circuit Court.
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In Cuno v. DaimlerChrysler, Inc., a group of businesses challenged an incentive package offered by Ohio to DaimlerChrysler, Inc, which included a franchise tax credit. The Sixth Circuit Court, which also has jurisdiction over Tennessee, invalidated the franchise tax credit as a violation of the Commerce Clause of the United States Constitution because the credit discriminated against interstate commerce. If Cuno stands on appeal, it will call into question the constitutionality of numerous credits for jobs or investments including the Tennessee job credits against franchise tax.
Double-taxation is another challenge caused by the property base component of Tennessee’s franchise tax. The franchise tax is computed on the higher of a company's taxable net worth or net book assets inclusive of real and tangible personal property in Tennessee. In addition, businesses are subject to real and personal property taxes. Thus, both real and personal property are effectively subject to double taxation as the value of both real and personal property are included in the base of two taxes, neither of which allow for a credit against the other.
Keeping Recommendations Revenue Neutral
The Tennessee Tax Structure Study Commission focused solely on designing revenue neutral recommendations for the State’s tax structure. This ensured the integrity of the Commission’s process, and removed any threat of the work being interpreted as a “smoke screen” for tax hikes.
Defining Adequacy
Many speakers expressed concern that the correlation between Tennessee’s low tax burden and poor performance in education and health negatively affect the State’s ability to recruit and retain high quality jobs to improve standard of living. In effect, they argue the revenue structure is not adequate to improve Tennessee’s low rankings. Obviously, if there is less revenue available, then a state will deliver fewer services or a lower level of service.
Tennessee ranks low in a number of quality of life measures:
• Home and community based care (ranked 50th nationally);
• Per pupil spending (ranked 42nd nationally);
• Public high school graduation rates (ranked 48th nationally);
• Spending for the arts (ranked 48th nationally);
• Health (ranked 44th nationally); and
• Total education spending per capita (ranked 49th nationally).3
3 Congressional Quarterly's State Fact Finder 2002. Page 20 of 118 An elastic tax system is more stable than an inelastic system in that revenues grow in a constant relationship to income.
Tennessee consistently ranks low in overall tax burden among the 50 States:
• A study by the U.S. Census Bureau found that the typical Tennessean pays 20% less in state taxes than residents of other states.4
• The Tax Foundation, a non-partisan organization that studies tax and budget policy, ranked Tennessee’s tax burden as fourth lowest nationally.5
• The Massachusetts Taxpayers Foundation ranked Tennessee 48th in combined state and local tax burden.6
However, the Commission concluded that it is the Legislature and the Governor’s responsibility to determine how much State revenue is adequate to provide services to Tennesseans. Accordingly, the Commission limited its examination of the adequacy of the current tax system to the determination of whether the current tax system is sufficient to raise revenue meeting the State's needs, whatever they may be, without sacrificing competitiveness, fairness, and revenue stability.
Defining Elasticity
In regard to taxation, the term "elasticity" refers to the level of responsiveness in a tax system in relation to changes in the economy. Elasticity is typically measured in terms of natural changes in revenue, and does not include the effects of revenue changes generated by legislative changes in tax base or rates. Specifically, the elasticity of a tax is computed by dividing the percent growth in tax revenues by the percent growth in personal income. If revenues grow at a slower rate than income, elasticity is less than one, and the tax is considered to be inelastic. If revenues grow at the same rate as or faster than income, elasticity is one or greater, and the tax is considered to be elastic. In general, a tax is considered to be more stable and balanced if short-term elasticity differs little from long-term elasticity.
National experts presented summary information regarding elasticity. In general, the income tax is found to respond in an elastic manner. By contrast, a sales tax historically tends to be inelastic. This inelasticity contributes to the cycle of increased sales tax rates in Tennessee.
4 U.S. Bureau of Census Report, June 2004. 5 Tax Foundation, 2004. 6 Massachusetts Taxpayers Foundation, Sept. 2004. Page 21 of 118
Defining Regressivity
Regressivity is a measure of the burden of a particular tax in relation to income. The term "regressive" refers to a tax system that places a proportionately higher burden on lower income households than on higher income households. The term "progressive" refers to a tax system that takes a larger share of income of higher income households than of lower income households. While most experts agree that a regressive tax is unfair because it places the greatest burden on those least able to pay, whether a tax is regressive, progressive, or proportional is linked to a number of factors, and cannot be determined solely by reference to rates.
For example, an income tax, which has increasingly higher tax rates as income increases, is generally considered to be progressive. In contrast, consumption taxes are generally considered to be regressive because lower income persons spend proportionately more of their income on the tax than high income persons. However, regardless of the rate structure, an income tax could be regressive if deductions and credits are only available to high-income taxpayers, and a sales tax could be progressive if the tax is not imposed on necessities such as food and shelter.
In terms of regressivity, Tennessee has consistently ranked third worst nationally.7
7 Congressional Quarterly's State Fact Finder 2002. Page 22 of 118
Findings and Analysis
This section summarizes key points from the first two phases of the Commission's work process. The Commission examined the input from more than 100 presentations, as well as historical revenue data. Note that the rates and percentages discussed below are subject to change, and represent the most recent data available as of the publication of this report.
General Findings Regarding the Current Structure
Data was gathered in Phase One to obtain a clear and objective picture of the State’s current tax structure. Figure 1 illustrates the sources for Tennessee's Fiscal Year 2003-2004 Revenue and the proportion of revenue raised by each source.
Figure 1. Sources for Tennessee's Fiscal Year 2003-2004 Revenue
The sales and use tax accounted for over 63% of the overall taxes collected by the Tennessee Department of Revenue for the fiscal year ended June 30, 2004. The general State
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sales and use tax rate is 7% for most items. There is a special State rate of 6% for food and food ingredients. Currently, there are several special State rates for certain services and for items sold to certain taxpayers.
Cities and counties may also impose a local option sales tax at a rate of up to 2.75% on the tangible personal property or taxable service, but the tax is only applicable to the first $1,600 of any single article of tangible personal property. Further, there is an additional State sales tax rate of up to 2.75% imposed on the amount in excess of $1,600 but less than or equal to $3,200 on the sale or use of any single article of tangible personal property.
While businesses receive sales tax exemptions on goods purchased for resale and on manufacturing inputs, they do pay sales tax on many other expenses such as supplies, furniture, computer equipment, etc. In fiscal year 2003, businesses paid approximately 40% of sales tax revenues or $2.3 billion. Corporate excise and franchise taxes were approximately $700 million and $500 million in the same year. This means that the State sales tax is the single largest business tax in Tennessee.
The excise tax accounted for approximately 8% of 2004 collections but is the second most important source of tax revenues collected by the Department of Revenue. The excise tax is borne entirely by businesses, and is assessed on business income. The excise tax rate is 6.5% of Tennessee net earnings.
The franchise tax rate is $0.25 for each $100 of the higher of taxable net worth or actual value of real and tangible personal property owned or used in the State. There is a minimum tax of $100. This tax comprised approximately 6% of the taxes collected by the Department of Revenue in 2004, and is borne entirely by businesses.
In addition to the taxes listed above, the Tennessee Department of Revenue collected substantial amounts for gasoline and petroleum taxes, motor vehicle registration and title fees, business, privilege taxes, “sin taxes” (alcohol, beer, and tobacco taxes), gross receipts tax, and other miscellaneous taxes. These other taxes comprised approximately 23% of the tax revenues collected by the Department of Revenue in 2004.
As Figure 2 indicates, when compared to the rest of the region, Tennessee is excessively reliant on the sales tax. Approximately 60% of revenues are generated from sales tax, compared to 32% nationally. If you factor in selective sales or special excise taxes on items such as gasoline, tobacco, beer and mixed drinks, the number approaches 70 percent. This stands in contrast to the nation as a whole and to most other states in the region.
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Figure 2. State Tax Mix [Percentage Distribution – 2001]
State Tax as a Function of Income and Regressivity
Figure 3 shows the relationship of State taxes as a percentage of income. Tennessee runs a full percentage point below the average of all 50 States. The 1993 up-tick reflects the 1992 sales tax rate increase from 6 to 6.5 percent.
Figure 3. State Taxes/Income [Percent of Personal Income 1985-2001]
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As shown in Figure 4, regional data also reflect Tennessee’s low tax burden.
Figure 4. State Taxes/Income [Percent of Personal Income - 2001]
Although nationally and regionally Tennessee is considered a low tax State, the proportional burden for low-income residents is high. According to the Institute of Taxation and Economic Policy (ITEP), lower-income Tennessee families pay a substantially higher percentage of income in taxes, compared to households with higher income. As a result, the current structure is considered highly regressive and ranks third nationally in regressivity.
The ITEP reports break out income in seven quintiles. The numbers on the bars of Figure 5 indicate Tennessee’s national ranking, e.g. the 3.4% tax burden for the top quintile means the State ranks 44th nationally for that quintile.
Figure 5. Tennessee Tax Burdens, Ranked by Quintile
Figure 6 shows the tax burden on a family of four with different income levels. The burden includes major state and local taxes. The final row lists the progressiveness of the tax system as a measurement of the relationship between what the $25K income family pays and what the $150K income family pays. According to the District of Columbia study, the average family of four earning $25K annually pays 1.2 times what the $150K family pays, relative to income.
Figure 6. Family Tax Burden (2001)
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Regressivity has plagued the Tennessee tax system for more than thirty years. The Final Report of the 1974 Tennessee Tax Modernization and Reform Commission described the Tennessee tax structure as the most regressive in the South. The Final Report of the 1985 Tennessee Special Joint Legislative Task Force on State and Local Tax Structure, the Task Force described the sales tax as twice as burdensome on lower income families compared to higher income families. Further, the 1985 Task Force explored numerous exemptions that exacerbated this problem in favor of higher income families.
In spite of this long history of advocating against the regressivity and inequity of Tennessee's predominately sales tax based tax structure, no progressive changes have been made. In fact, the Tennessee tax system has become more regressive since 1990, largely due to sales tax increases.
Figure 7. Changes in Taxes as Shares of Income, 1989-2002
Elasticity and Stability of Current Structure Page 27 of 118
When considering soundness of the tax structure, it is important to consider how the economy affects the primary revenue source. While the sales tax appears stable and even prosperous during favorable economic times, such as during the booming 1990s, it generates inadequate amounts when consumer and business spending decline.
The over-reliance on the sales tax has resulted in a current structure with a very narrow base. The narrow base then limits alternatives when deficits occur and forces existing tax rates to increase. This phenomenon is best illustrated by the fact that, since the enactment of the sales tax shortly after World War II, the sales tax rate (combined state and local sales tax) has increased steadily from 2% to nearly 10 percent.
Weak sales tax collections in the first four months of fiscal year 2005 resulted in a revenue shortfall of almost $100 million. After the Funding Board's December meeting, James White, executive director of the General Assembly's Fiscal Review Committee, said he was troubled by the drop-off in sales tax collections. He said when the State raised the sales tax in 1992, Tennessee enjoyed four strong years of growth, and it wasn't until 10 years later that sales tax growth fell below 5 percent. ''Compare that with 2002,'' White said, ''It's a little apples to oranges, but we had one year of strong growth, a second year it fell back some, and we are predicting that by the third year we will be below 5% in the growth of the sales tax.''
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Figure 8. Historical Tennessee Sales Tax Rates
Year Interval Years Governor Rate Increase in Rate Percent Increase in Rate
1947 - Jim Nance McCord 2% - -
1955 8 Frank Clement 3% 1.0% 50%
1971 16 Winfield Dunn 3.5% 0.5% 16.7%
1976 5 Ray Blanton 4.5% 1.0% 28.6%
1984 8 Lamar Alexander 5.5% 1.0% 22.2%
1992 8 Ned McWherter 6% 0.5% 9.1%
2002 10 Don Sundquist 7% 1.0% 16.7%
Source: TACIR
Figure 9 provides a breakout of the sales tax base. Again, during positive economic times the revenue flows. However, when there is a downturn in the economy, purchases of autos, boats and aircraft decline significantly, thereby creating additional stress on an already strained revenue system.
Figure 9. Tennessee Retail Sales Tax Base FY 2001
Page 29 of 118 It is for precisely these reasons that James Hite of Clemson University declared that relying on sales tax is "like riding a horse that is rapidly dying."
Note that a key finding in the analysis of sales tax was the amount of revenue generated by taxing food. Many advocacy groups push for the elimination of taxes on food in order to make the system fairer and less regressive. Yet, during a downturn the tax provides a stable source of revenue to the State. This creates a conflict between the guiding principles of fairness and soundness. The tax provides stable revenues during the downturn but imposes greater burdens when taxpayers are least able to pay.
When sales tax began in the 1940’s, manufacturing was the predominant economic activity. Today, as illustrated by Figure 10 on a national level and Figure 11 in Tennessee, services play a bigger role. For example, Doris Martin, the revenue administrator for the City of Knoxville presented “Tax Structure and Local Economy.” Her presentation echoed other presenters’ observations that the economy has shifted from a goods to a service economy. In 1992, 21.96% of the Knoxville workforce was employed in goods-producing jobs. By 2001, only 18.32% of the workforce was employed in goods-producing jobs. During that same time period, service oriented jobs increased from 59.28% to 65.34% of the workforce. Based upon the testimony received by the Commission, this shift to services is not anticipated to reverse itself in the near future. In fact, services may continue to become a larger part of the economy.
Since many services are not taxed, sales tax has become a significantly less effective means of revenue production. The Commission carefully considered recommendations for subjecting additional services to sales and use tax. However, it determined that due to the potential of “tax pyramiding,” difficulty in administration, and the potential negative impact such taxes could have on attracting business, the Commission determined that Tennessee already taxes more services than most of the surrounding states and that it would be unwise to subject any more services to sales and use tax.
In addition to the shift to a service economy, the rise of mail-order and E-commerce has also eroded the sales tax base, helping antiquate any structure that is overly reliant on sales and use taxes. The 2008 projected revenue loss from E-commerce will range from $335 million to $508 million for combined state and local government in Tennessee8. It is increasingly obvious that Tennessee cannot raise sales tax rates indefinitely to overcome an eroding base.
8 Center of Business & Economic Research, University of Tennessee, "State and Local Sales Tax Revenue Losses from E-Commerce: Estimates as of July 2004." Page 30 of 118
Figure 10. Goods/ Services in National Gross Domestic Product 1970-2001
Figure 11. Goods/Services in Tennessee Personal Consumption 1945-2002
Goods and Services as a Percent of Personal Consumption
1945 1946 1947 1948 1949 1950
Goods 67% 68% 69% 68% 67% 67%
Services 33% 32% 31% 32% 33% 33%
1951 1952 1953 1954 1955 1956
Goods 67% 66% 64% 63% 63% 62%
Services 33% 34% 36% 37% 37% 38%
1957 1958 1959 1960 1961 1962
Goods 62% 60% 60% 59% 58% 58%
Services 38% 40% 40% 41% 42% 42%
1963 1964 1965 1966 1967 1968
Goods 57% 57% 57% 58% 57% 57%
Services 43% 43% 43% 42% 43% 43%
1969 1970 1971 1972 1973 1974
Goods 57% 57% 57% 58% 57% 57%
Services 43% 43% 43% 42% 43% 43%
1975 1976 1977 1978 1979 1980
Goods 57% 57% 57% 58% 57% 57%
Services 43% 43% 43% 42% 43% 43%
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1981 1982 1983 1984 1985 1986
Goods 57% 57% 57% 58% 57% 57%
Services 43% 43% 43% 42% 43% 43%
1987 1988 1989 1990 1991 1992
Goods 57% 57% 57% 58% 57% 57%
Services 43% 43% 43% 42% 43% 43%
1993 1994 1995 1996 1997 1998
Goods 57% 57% 57% 58% 57% 57%
Services 43% 43% 43% 42% 43% 43%
1999 2000 2001 2002
Goods 57% 57% 57% 58%
Services 43% 43% 43% 42%
Source: NCSL calculation based on U.S. Bureau of Economic Analysis data, 2003
Further sales tax erosion occurs when Tennesseans make purchases in bordering States, resulting in taxable retails sales growing more slowly than the economy as a whole. The Chattanooga City Finance Director told the Commission that after the 2002 sales tax rate hike, sales tax revenue in the north Georgian counties grew 4.2% during the initial four months of the increase while Chattanooga’s growth fell from 2.1% to 1.7 percent. This steadily increasing phenomenon is commonly referred to as border leakage.
Dr. Steb Hipple of the Bureau of Business and Economic Research, East Tennessee State University, estimates that Tennessee annually loses $354 million in retail sales to Virginia because of the much higher sales tax rate. Per Dr. Hipple, that transfer of retail sales costs Tennesseans 2,309 jobs and $49 million annually in lost household income, as well as costing Tennessee $34 million in lost sales tax revenue.
The highest grossing Wal-Mart is located just south of Memphis in Southaven, Mississippi. Shelby County Mayor A.C. Wharton told the Commission that, with Southaven's population of only 30,000, it was reasonable to assume that many of his county's residents purchase items at the Mississippi store rather than at a Tennessee store.
Border leakage is a great challenge to sales tax collection in general, but is particularly problematic in Tennessee. Tennessee is a long, narrow State with almost 50% of its population distributed along its border. Sales tax is the most vulnerable to border leakage of the State taxes, and we share our border with eight states which all boast lower average sales taxes. Taxes on food, specifically, are lower in neighboring states. At 8.35%, Tennessee has the highest average food tax in the nation, and certainly in its region.
Figure 12. Regional Sales Tax and Food Tax Comparison
Source: CCH Tax Research Network
As illustrated by Figures 13 and 14 from a State budget perspective, Tennessee's budget gap would be a staggering $1.8 billion without the sales tax rate increases in 1984, 1992 and 2002. Tennessee’s elasticity problem is worse than most states.
Figure 13. General Fund Revenue Sources
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Figure 14. Total Revenue Collections as a Percent of Personal Income
As with regressivity, inelasticity has been a central problem with the Tennessee tax system for more than thirty years. In the 1974 Final Report of the Tennessee Tax Modernization and Reform Commission, that Commission described the Tennessee tax structure as the least responsive to economic change in the South. In the 1985 Final Report of the Tennessee Special Joint Legislative Task Force on State and Local Tax Structure, the Task Force stated that the sales tax was by its very structure negatively inelastic, and suggested that elasticity would be even worse if grocery food was exempt. This problem has only grown worse over time.
Streamlined Sales Tax Project
The Streamlined Sales Tax Project is a comprehensive multistate initiative under which a significant number of states are reforming their sales tax laws in a uniform fashion in order to reclaim sales tax revenues lost to mail-order, E-commerce, and border leakage.
In the 1990s, as a result of increased mail-order, internet, and cross-border business activity, states perceived that they were losing significant sales and use tax revenues to out-of-state sellers. In response, states passed laws that required out-of-state sellers to collect sales tax if the sellers had an "economic presence" in the State. In 1992, however, the United States Supreme Court issued a landmark decision, which struck down those laws, by reaffirming that an
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entity had to have “physical presence” in a state in order for the state to have the right to subject the entity to a sales and use tax collection and reporting requirement.9
The United States Supreme Court decision gave birth to the Streamlined Sales Tax Project. State and local governments, with input from the business community and other interests, designed a "streamlined" system to simplify and update sales and use tax collection and administration.10 Due to a wide disparity in the sales and use tax laws across the country, the states participating in Streamlined realized they would need to adopt legislation to create:
• State-level administration of the sales and use tax,
• Uniformity in state and local tax bases,
• Central electronic registration systems,
• Simplification of state and local tax rates,
• Uniform sourcing rules for all taxable transactions,
• Simplified administration of exemptions,
• Simplified tax returns,
• Simplification of tax remittances, and
• Protection of consumer privacy.11
Streamlined is not in and of itself an attempt to increase elasticity or reduce regressivity in the Tennessee tax structure, but may be part of such an attempt if accompanied by sales tax rate reduction and significant reforms elsewhere in the Tennessee tax code. Currently, Streamlined is slated to go into effect in 2005; however, a postponement of the effective date of Streamlined would not be surprising.
Franchise Tax and Anti-Competitiveness
Tennessee is rapidly becoming less competitive regionally in drawing and retaining businesses due to high franchise tax rates and double-taxation resulting from the property base component of the franchise tax. Many companies do not have substantial net worth during start up phases due to losses, but they still have to pay Tennessee’s franchise tax due to the net book value of their property. Further, while job credits (as long as they exist) may partially offset the competitive disadvantage of the property base component, many startup and service businesses do not qualify for franchise tax job credits. Finally, double taxation is another challenge caused by the property base component of Tennessee’s franchise tax as tax is already imposed on real and tangible personal property under the property tax.
9 Quill Corp. v. Heitkamp, 504 U.S. 298 (1992). 10 According to an Executive Summary, issued April 2, 2002. 11 For detailed information, see the Streamlined Sales and Use Tax Agreement, Adopted November 12, 2002 and other publications of the Streamlined Sales Tax Project. Page 35 of 118
Other Findings
In addition to the findings above, the Commission heard testimony regarding the following:
1. The current property tax is constitutionally based, and is thereby vulnerable to challenge that would invalidate the tax in its entirety. Experts have strongly suggested that switching from a constitutionally based property tax to a statutorily based property tax will alleviate this risk.
2. Experts and concerned citizens have strongly suggested that, in the interest of taxpayer fairness, tax appeals should be subject to independent review. This change would give taxpayers a fair and impartial hearing in the first stage of a tax dispute and should reduce the frequency of taxpayers feeling the need to seek relief in a higher court simply because they believe they were not given a fair hearing earlier.
3. Also in the interests of fairness, experts and concerned citizens have strongly suggested that the pay-to-play rules should be eliminated. The requirement that a taxpayer either pays the tax assessed or posts a tax for 150% of the tax due in order to appeal a decision of the Department of Revenue is a significant bar to a taxpayer's right to appeal.
4. In regard to business taxes, some experts have suggested that Tennessee should require combined filing by related corporations in a manner similar to California, and enact a throwback rule whereby Tennessee would treat out-of-state sales as Tennessee sales for apportionment purposes where such sales were not taxed by the destination state.
5. Some experts suggested that, where a state imposes different and higher taxes than Tennessee, Tennessee should subject a business domiciled in that state and doing business in Tennessee to retaliatory taxes such that the business would have to pay the same taxes as a Tennessee-domiciled business doing business in that state.
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Recommendations
Current State Fiscal Climate
Even after passing the 2002 tax increase – a move that was expected to cover the State’s revenue needs for at least two years – Tennessee still faced a deficit in the hundreds of millions of dollars. Shortly after taking office, Gov. Bredesen proposed 9% across-the-board cuts for the 2003-04 State agency budgets. Then, only six months after the legislature passed that budget, Gov. Bredesen asked department heads to consider an additional 5% cut. While most legislators support the approach of cuts in State spending, it is a short-term fix. The issue of revenue policy has not been resolved.
To quote one of the first speakers to address the Commission, “Some kind of dramatic reform is needed. Tennessee’s tax structure is famously dysfunctional and inadequate to State needs."12 Basically, that sentiment has been shared by the majority of outside experts who have addressed the Commission.
Recommendations
The Commission determined that the implementation of a program of total tax reform was necessary to enhance the competitiveness, fairness, and revenue raising stability of the Tennessee tax structure. The Commission further determined that any such program of reform could be revenue neutral and still meet the State's revenue requirements as long as the new tax structure broadened the tax base and reduced rates.
The Commission made the following recommendations:
1. Reduce the general State sales tax rate to 6%, and eliminate the general local option sales tax. This would reduce the overall general state and local sales tax rate from a maximum of 9.75% to 6 percent. This rate is similar to neighboring state and local combined sales tax rates, and should increase the competitiveness of Tennessee's sales tax; thereby reducing the impetus for border-leakage and reducing the incentive for making purchases via mail-order and the Internet.
12 Richard Greene, “The Way We Tax: A 50-State Report”, Governing Magazine, February, 2003. Page 37 of 118
Finally, the single statewide general sales tax rate should simplify the tax system and facilitate Tennessee's participation in the Streamlined Sales Tax Project.
2. Reduce the State sales tax rate on grocery food to 4%, and eliminate the local option sales tax on grocery food. This would reduce the overall state and local sales tax rate on grocery food from a maximum of 8.35% to 4 percent. This rate is the average among neighboring states, and will move Tennessee's sales tax on food from the highest to the middle. This rate reduction should have a similar pro-competitive effect as the general sales tax rate reduction in regard to sales of non-perishable food items for Internet and mail order purchases and both non-perishable and perishable food items for border-leakage. Additionally, this rate reduction should reduce the regressivity of the sales tax, as the sales tax on food is the heaviest burden on low- and middle- income individuals. Finally, the single statewide sales tax rate on grocery food should simplify the tax system.
3. Repeal the Hall income tax. The effects of the Hall income tax are extremely capricious, and may result in severe anti-competitiveness, regressivity, and unfairness, because the law contains no reasonable personal deductions. Many taxpayers, especially retirees, whose income comes chiefly from dividends and interest are required to pay the Hall income tax, while low-income individuals who earn income from other sources are not subject to tax on that income. The Hall income tax effective encourages retirees to leave the State. Repealing the Hall income tax eliminates a selective and unfair component of the current tax structure.
4. Eliminate the property basis of the business franchise tax, and reduce the rate by 50% to $0.125 per $100. The property basis of the franchise tax results in double-taxation of both real and personal business property, and may discourage start-up ventures from locating in Tennessee (depending on the outcome of Cuno, and the future applicability of credits). Additionally, the franchise tax rates are high in comparison to neighboring states. These recommended changes should improve Tennessee's competitiveness with neighboring states for business investment.
5. Local governments will be "held harmless" from the recommended changes, particularly relative to the sales tax and Hall income tax revenue loss. Distribution of annual growth would be based upon a formula that includes population, situs, and services provided by local government (e.g., education, police, fire, social services, etc).
6. Introduce independent review of all tax appeals. An independent review improves fairness to taxpayers. As part of the independent review, eliminate pay-to-play rules which require a taxpayer to pay or post a bond of 150% of the tax liability in order to appeal. The requirement discourages valid appeals and has already been eliminated in most states.
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7. Limit tax growth to a percentage of the state economy. In no year could appropriations be in excess of 6% of the overall State economy, based on factors such as aggregate personal income and population growth. Any excess will be rebated to taxpayers or deposited in a Rainy Day Fund, if the excess collections are less than the cost of processing rebates.13
These recommended changes to the Tennessee State and local tax structure are expected to reduce revenue by more than $3 billion. Recognizing that the imposition of tax is limited to sales, property, and income, the Commission considered a variety of possible methods of offsetting this change in revenue, including, but not limited to, the enactment of numerous modified consumption taxes, a pure value added tax, a single-rate exchange tax, a health care provider tax, a business entity tax, an intangible property tax, a wealth equity tax, gas tax increases, a single-rate sales tax, a dramatically broadened sales tax on services, a personal income tax, a statewide motorized item registration tax, and a statewide real property tax.
After reviewing substantial testimony regarding non-traditional tax options like a value added tax, the Commission determined that the enactment of any taxes that did not correspond in some manner to the taxes imposed by bordering states would be anti-competitive and difficult to administer. Accordingly, after much debate and careful consideration, the Commission narrowed the discussion to two alternative proposals.
In regard to Proposal One, the Commission considered the enactment of a broad based personal income tax with a graduated rate ranging from 3.5% to 6%, a $15,000 exemption for single filers, a $2,000 deduction per dependent, and a credit against professional privilege tax for the amount of income tax paid. It is anticipated that implementation of Proposal One would generate approximately $3 billion in revenues.
The proposed broad based personal income tax would be applied as follows:
Deduction: $2,000 per dependent
Exemption $15,000 $15,000 $30,000 $22,050
Rate Single Filers Married Filing Single Married Filing Jointly Head of Household
3.50% $15,000 $15,000 $30,000 $22,050
4.25% $25,000 $25,000 $50,000 $36,750
5.00% $35,000 $35,000 $70,000 $51,450
6.00% $50,000 $50,000 $100,000 $73,500
13 Regarding Recommendation 7 above, the Commission has heard concerns about the Legislature’s lack of spending constraint. Spending discipline has not been a historical problem, as evidenced by Tennessee’s consistent ranking among states with the lowest overall tax burden. The Commission has confidence the Legislature will continue its record of spending constraint. Recommendation 7 addresses restraints on growth and ties it to measures of the overall state economy, such as total aggregate personal income and population growth. Page 39 of 118
In regard to Proposal Two, the Commission maintained the need to reduce the overall sales tax rate, reduce the rate on groceries, address the business franchise tax, and hold local governments harmless. This proposal focused on revenue mechanisms that did not include a tax on personal income yet met the goal of revenue neutrality. Proposal Two considered the enactment of a statewide personal property tax on motorized, registered items (e.g. boats, autos, motorcycles, airplanes, etc.) based on value with an average assessment of $100 per item, and a statewide tax on real property at a rate of $2.60 per $100 of value. In this proposal the franchise tax was eliminated completely to avoid double taxation on business property. It is anticipated that implementation of Proposal Two would generate approximately $3 billion in revenue.
The Commission concluded that, while neither proposal would completely ensure that Tennessee would be free from budget crisis, Proposal One had the least effect on the State's competitiveness with its neighbors and better addressed factors of balance, stability, fairness and elasticity to the Tennessee tax system. Increasing diversity in the taxation of what is bought, owned, and earned (i.e., taxing the broadest possible base at the lowest possible rates) would allow Tennessee to meet economic fluctuation with revenue flexibility. Accordingly, the Commission recommended the tax reductions and eliminations listed above in combination with the enactment of a broad based personal income tax outlined in Proposal One.
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Impact Projections
The Commission requested the Women’s Social Policy and Research Center (W-SPARC) at Vanderbilt University to augment its 2001 analysis of various tax proposals. The analysis projected tax burden based on household type and income level. Progressivity analysis for three scenarios -- the current tax structure, Proposal, 1, and Proposa, l 2 -- is illustrated in Charts 1 through 9.
At its July 2004 meeting the Commission reviewed results of a simulator that provided county-level impact of previous proposals, i.e. percentage of households that would have a lower, higher or relatively equal tax burden. The Commission requested the simulator be updated to provide county-level impact specifically for Proposal 1 and Proposal 2. However, the Department of , Revenue declined to provide the information citing an inability to factor into its model the 2004-05 federal sales tax deductibility provisions , passed in October 2004.
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Tax Reform and Tennessee Households:
A Distributional Impact Analysis
Prepared for the Tennessee Tax Structure Study Commission
By
Ronnie Steinberg, PhD
Lindsay Kee, MSW
Emily Tanner-Smith, MA
Women’s Social Policy & Research Center
Vanderbilt University
Box 133, Station B
Nashville, TN 37235
Phone: 615-343-0927
Website: www.wsparc.org
December 17, 2004
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EXECUTIVE SUMMARY
In May 2004, the Tennessee Tax Structure Study Commission (TTSSC) requested that the Women’s Social Policy & Research Center at Vanderbilt University (W-SPARC) conduct preliminary impact analyses of several tax reform scenarios on Tennesseans.
Three scenarios were selected for final analysis:
�� The status quo sales tax,
�� A system with a lower sales tax rate, a reduced sales tax on groceries, and a graduated tax on personal income, and
�� A system with a lower sales tax, a reduced sales tax on groceries, a statewide tax on real property and a title tax on registered, motorized items, including cars, motorcycles, boats and airplanes.
The Commission requested that each scenario be analyzed by type of household, by income, and by race.
We studied three basic household types at seven representative income levels ranging from $7,700 to $140,150:
�� Single adult households with no dependents,
�� Single adult households with two dependents, and
�� Husband/wife households with two dependents.
The analyses were conducted first for the Tennessee population as a whole, then for blacks and whites separately.
Principal Findings
By tax scenario:
�� The status quo sales tax scenario results in a regressive tax structure: the higher the income, the lower the tax burden. If we compare the second lowest and highest income brackets by household type, this pattern becomes strikingly apparent:
o Husband/wife households with two dependents earning $14,854 pay 11.78 percent of their income in taxes, while those earning $140,150 pay 7.18 percent of their income in taxes.
o Single adults with two dependents earning $14,854 pay 10.45 percent of their income in taxes, while those earning $140,150 pay 6.88 percent of their income in taxes.
o Single adults earning $14,854 pay 8.06 percent of their income in taxes, while those earning $140,150 pay 6.41 percent of their income in taxes.
�� The lower sales-lower grocery-graduated income tax scenario is progressive: the higher the income, the higher the tax rate.
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o Households earning $78,619 and $140,150 have a slightly greater tax burden from the lower sales-lower grocery-graduated income tax scenario than from the status quo sales tax due to the progressive nature of the income tax. For households at these income groups, the lower sales-lower grocery-graduated income tax scenario imposes a tax burden ranging from 8.13 to 9.83. This represents an increase in tax burden over the status quo tax scenario of 0.10 to 3.42.
o Single adult households begin to have a larger tax burden under an income tax scenario than under the status quo at $44,431, as these households cannot take advantage of exemptions for a second adult or deductions for dependents. At that income level, a single adult household pays 7.51 percent of its income in taxes. If an income tax were implemented, that household’s tax burden would increase 0.79 percent.
o We estimate that households with children and incomes less than $70,000 would pay less under an income tax than they do under the current system. Approximately 80 percent of Tennesseans earn less than $70,000 annually.14
�� The lower sales-lower grocery-state real property-title tax scenario results vary by income level.
o For households with incomes between $14,854 and $29,467, this tax scenario is progressive.
o For households between $29,467 and $140,150, this tax scenario becomes a flat tax: regardless of income, the tax burden from the property tax remains 8.67 percent of income.
o We assumed households earning less than $25,000 would not own property and thus not pay the property tax directly. However, it is likely that these households will be affected indirectly by these taxes in the form of higher rents and higher prices for used or inexpensive cars.
The lower sales-lower grocery-state real property-title tax scenario creates an exorbitant tax burden on those earning $29,467 and $44,431, nearly doubling the tax burdens of the other two scenarios. For households earning $78,619 and $140,150, this scenario imposes a tax burden more than twice that of the status quo sales tax and approximately one and one-half times that of the lower sales-lower grocery-graduated income tax scenario.
�� More than half of almost every household’s tax burden comes from the sales tax under both the status quo sales tax scenario and the lower sales-lower grocery-graduated income tax scenario.
�� Under the lower sales-lower grocery-state real property-title tax scenario, the largest portion of the tax burden comes from the property tax for those households assumed to own property.
14 Current Population Survey, 2004. Page 44 of 118
By income level:
�� Households making $7,700 have exorbitant tax burdens regardless of the tax scenario, but particularly under the status quo sales tax.
o The highest tax burden for any household under any plan falls on households earning $7,700 under the status quo sales tax. Under this scenario, the single adult household pays 14.05 percent of its income in taxes, the single adult with two dependents pays 18.80 percent, and the husband/wife household with two dependents pays 21.40 percent. Under the status quo sales tax structure, low-income households of all types pay a larger share of their income in taxes than high-income households. The amount of revenue generated from these households is not high, but it is a significant proportion of the income available to these households.
o These households’ tax burden decreases markedly under the lower sales-lower grocery-graduated income tax scenario.
�� These findings suggest that, regardless of the final scenario the TTSSC recommends, the state needs to consider some additional mechanism, such as a refundable state earned income tax credit, for providing relief for these households.15
�� The percentage of income taxed for high-income households under any scenario is lower than the percentage of income low-income households pay in taxes.
By gender and race:
�� The burden of paying sales tax in Tennessee falls disproportionately on women, who are more likely to be in low-income brackets. This is especially true for single women with children. Of households with children in Tennessee, 23 percent are headed by single women; almost 60 percent of these single mothers earn less than $20,000 per year.16
�� The tax burden falls disproportionately on people of color, because they too are concentrated in lower-income brackets. One-third of African-Americans in Tennessee earn less than $10,000 per year, and two-thirds earn less than $25,000 per year. Nearly 52 percent of Hispanic households in Tennessee earn less than $25,000 per year. One third of Tennessee’s Native American households earn less than $25,000 per year.17
15 The Consumer Expenditure Survey includes expenditures for food that were purchased with food stamps or WIC vouchers. These purchases would not be taxed in Tennessee, but it was impossible to remove them from our estimates of expenditures for food during this study. The subset of low-income households that use the food stamp and WIC programs would experience some sales tax relief from the fact that these purchases may not be taxed. 16 U.S. Census 2000; Current Population Survey 1998, 1999, 2000. 17 Caizza, 2000. Page 45 of 118
INTRODUCTION
In May 2004, the Tennessee Tax Structure Study Commission (TTSSC) requested that the Women’s Social Policy & Research Center at Vanderbilt University (W-SPARC) conduct preliminary impact analyses of several tax reform scenarios on Tennesseans. Three scenarios were selected for final analysis:
�� The status quo sales tax,
�� A system with a lower sales tax rate, a reduced sales tax on groceries, and a graduated tax on personal income, and
�� A system with a lower sales tax, a reduced sales tax on groceries, a statewide tax on real property and a title tax on registered, motorized items, including cars, motorcycles, boats and airplanes.
The specific details of each of these scenarios are presented in the “Background” section and in Appendix 2.
The Commission requested that each scenario be analyzed along three dimensions: by type of household, by income, and by race. We collapsed detailed data on household types into three basic household types:
�� Single adult households with no dependents,
�� Single adult households with two dependents, and
�� Husband/wife households with two dependents.
We selected seven representative income levels ranging from $7,700 to $140,150.
W-SPARC’s Qualifications. W-SPARC is uniquely qualified to carry out an analysis of the impact of tax scenarios in Tennessee on women, minorities, and households. W-SPARC is the only research center in Tennessee that has examined the distributional impact of state tax scenarios. It is the only research center in the country focused on analyzing state policy and its impact on economic disparities of women. W-SPARC is based at Vanderbilt University, a world-renowned, comprehensive research institution. W-SPARC has experience in compiling the data necessary for such a study, and in conducting such studies successfully.
In 2001, at a time when Tennessee legislators were debating a number of tax reform options, W-SPARC compiled and analyzed data to examine the distributional effects of three prominent scenarios:
�� The status quo sales tax,
�� A tax on sales and services, and
�� A reduced sales tax in combination with a graduated income tax.
In May 2001, W-SPARC released the results of this study. Because W-SPARC conducted this prior study, the TTSSC identified us as having the best data and model available to complete the current study in a timely and efficient manner.
The 2001 Tax Impact Study. Selecting representative households was the first step in our study. In order to do this in a systematic fashion that reflects the actual population distribution in Tennessee, we used the Current Population Survey (CPS) to identify the income categories and
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family types in which a significant number of Tennessee households fell. Next we needed to calculate the households’ sales tax burdens. We used the Consumer Expenditure Survey (CES), a routinely used dataset containing information on American consumer spending habits, to estimate average expenditures for our representative households. Then we applied the sales tax rates in each scenario to each household’s average expenditures in order to calculate their sales tax burdens. To calculate income tax burdens, we identified the exemptions, deductions, and income tax rates in each scenario and applied them to each representative household. Finally, W-SPARC added each representative household’s sales and income tax burdens to get their total tax burden under each scenario.
The Tennessee Advisory Commission on Intergovernmental Relations (TACIR) conducted a peer review of the study. Based on their validation of our data and methodology, they recommended that we testify before the state legislature in June 2001.
The 2001 study showed the following:
�� The status quo sales tax system and the tax on sales and services created the highest tax burden on low-income households.
�� The current sales tax structure results in low-income households paying a larger share of their income in taxes than high-income households. Increasing the sales tax would have disproportionately raised the tax burden on low-income households.
�� A tax on sales and services would have increased the proportion of income paid in taxes at all income levels, but would have hit low-income households the hardest.
�� A graduated income tax in combination with a reduced sales tax would have lessened the tax burden on people earning less than $60,000 (73 percent of Tennessee women) when compared to a tax on sales alone or a tax on sales and services.18
�� A graduated income tax in combination with a reduced sales tax would have increased the tax burden on the small proportion of Tennesseans who earned more than $113,000. However, the proportion of income that high-income households would have paid under a graduated income tax is only modestly greater than the proportion they would have paid under a sales tax alone or under a tax on sales and services. These calculations most likely overestimated the tax rate for households earning over $60,000 because the analysis relied only on state taxes and did not include the deductions available to upper-income households in the federal tax system.
�� Graduated income taxes shifted some of the tax burden from the lowest-income women to women who earned or who were in households with incomes above $60,000.
Differences Between the 2001 and 2004 Studies
Based on the successful completion of the 2001 study, the TTSSC asked W-SPARC to conduct a similar analysis of updated tax scenarios with more recent data.
For the 2004 study, we:
�� Shifted from a focus on women to a focus on households.
18 Current Population Survey 1998, 1999, 2000. Page 47 of 118
�� Updated the demographic data from which representative households were selected.
�� Updated expenditure figures to capture more accurately the distributional effect of differing sales tax scenarios.
�� Incorporated race into the analysis to examine the differential effects of various tax scenarios on households by race.
�� Examined a different set of scenarios developed by the TTSSC.
Please see Table 1 for a detailed comparison of what we did in 2001 and 2004.
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BACKGROUND
Household Distribution in Tennessee
The first step in this study identified and selected households that are representative of the actual population distribution in Tennessee. W-SPARC used data from the 2000-2002 March Supplement of the U.S. Census Bureau’s Current Population Survey (CPS) for this purpose. See Appendix 1 for a discussion of this methodology.
The results of this study allow for conclusions to be made about the impact of various tax structures on different households at different income levels in Tennessee. However, it is important to note that different subsets of the Tennessee population are more or less likely to be represented by the households under study. Accordingly, the tax burdens described in this study will vary for different kinds of Tennesseans. In conducting the demographic analysis we looked at what types of people are most likely to be in the representative households. Table 2 alerts us to differences by race in household type and income level that will lead to a differential impact of taxes by race.
Race
Race and Household Type. Table 2 presents the distribution of households in Tennessee by household type, income level, and race.19 Table 2 shows that there is little difference by race in the proportion of single adult households with no dependents. This holds true across income levels. However, striking race differences are apparent in households that involve marriage and/or children. The proportion of blacks in single parent homes is higher than the proportion of whites in single parent homes at every income level except the highest, where the difference is less than one percent. Similarly, the proportion of whites living in husband/wife households is higher than that of blacks at all but one income level, where the difference is less than one percent. Forty-seven percent of blacks in Tennessee live in single parent households, compared to 14 percent of whites. Seventy-one percent of whites live in husband/wife households, compared to 42 percent of blacks.
Race and Income. Most notably, blacks are more likely than whites to be in lower income brackets. Blacks are spread more evenly across income levels than whites, who are concentrated in the upper income levels. Thirty-nine percent of blacks live in households with incomes of less than $25,000, compared to 25 percent of whites. Other studies support the finding that blacks are concentrated in lower income levels. According the Institute for Women’s Policy Research, one-third of African-Americans in Tennessee earn less than $9,999 per year, and two-thirds earn less than $24,999 per year. Nearly 52 percent of Hispanic households in Tennessee earn less than $24,999 per year. One third of Tennessee’s Native American households earn less than $24,999 per year.20 Because people of color are concentrated in lower-income brackets, the tax burden falls disproportionately on them.
19 The CPS includes data on a number of different households. With the assistance of TTSSC Executive Director Eileen Smith, we collapsed the available household types into the three household types in this study: single adults with no dependents, single adults with two dependents, and husband/wife households with two dependents. These households were selected because they represented the largest proportion of Tennesseans. 20 Caizza, 2000. Page 49 of 118
Gender
Gender and Income. While not reported in these tables, some important gender differences in household type and income level are also worth noting. Women in general are likely to have lower incomes than men. Researchers often use one-half the median income in a region as a measure of access to adequate social and economic resources. More than two in ten Tennessee women fall below this line.21 Nearly two-thirds of working women in Tennessee earn less than $10.00 per hour, making it difficult for them to pay for health care, emergencies, and school supplies for their children, among other things. As Tennessee women are more likely to be in low-income brackets, the burden of paying sales tax in Tennessee falls disproportionately on them.
Gender and Household Type. In addition, some households include heavy concentrations of women. Of the single female households in Tennessee with no dependents, 34.1 percent are made up by women age 65 and over.22 Discussions of the impact of taxes on single adult households will especially describe this population. Elderly women tend to have lower incomes than elderly men, with wages relatively two-thirds that of men their age.23 Elderly women are also at higher risk of living in poverty than middle-aged people. Black women age 65 and older are in particularly economically vulnerable positions, with median incomes that are 65 percent of the income of elderly white women, 62 percent the income of elderly black men, and 38 percent that of elderly white men. Of households with children in Tennessee, 23 percent are headed by single women; almost 60 percent of these single mothers earn less than $20,000 per year24. Within almost every race, single women with children are at much higher risk of living in poverty than other households.
The impact of taxes on Tennessee households will differ for various subsets of the population, depending on which of the hypothetical households in this study best represent those groups.
Tax Scenarios
Of the various tax scenarios discussed in 2004, TTSSC requested W-SPARC perform final analyses on three scenarios.
Status Quo Tax Scenario. Under the status quo sales tax, calculations were made with a 7.00 percent sales tax on non-grocery items and a 6.00 percent tax on grocery items. Additionally, the local option sales tax was calculated at the maximum rate of 2.75 percent, which is the highest local option tax.
Lower Sales-Lower Grocery Tax-Statewide Real Property-Title Tax. The lower sales-lower food-real property-title tax scenario would lower the sales tax on non-grocery items to 6.00 percent and the sales tax on groceries to 4.00 percent. All local option sales taxes and single article taxes would be eliminated. Under this scenario the state would tax real property at a rate of $2.60 for every $100 of assessed value. Titled, registered & motorized items (including autos,
21 Caizza, 2000. 22 U.S. Census Bureau. Current Population Survey 2000, 2001, 2002. 23 Kivett and Schwenk, 1994. 24 U.S. Census 2000; Current Population Survey 1998, 1999, 2000. Page 50 of 118
boats, planes, etc.) would be taxed at a rate of 1.75 percent of value, averaging $100 per vehicle/item.
Lower Sales-Lower Grocery-Graduated Income. The lower sales-lower grocery-graduated income tax scenario would lower the sales tax on non-grocery items to 6.00 percent and the sales tax on groceries to 4.00 percent. This scenario would eliminate local sales taxes and the Hall income tax. The scenario offers a credit of the professional privilege tax. This scenario taxes income at a graduated rate, with rates ranging from 3.50 percent to 6.00 percent. Please see Appendix 2 for details about deductions, exemptions, and tax rates.
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FINDINGS
W-SPARC examined the impact of each of the three preceding scenarios on three different household types at seven different income levels. The analyses were conducted first for the Tennessee population as a whole, then for blacks and whites separately. The detailed methodology used to derive the findings is presented in Appendix 1. The results of the analyses follow.
Overall Impact
Table 3 shows the impact of all scenarios on all household types in Tennessee.
Tables 4-6 disaggregate data from Table 3 to describe each scenario. Table 4 describes the status quo tax scenario. Table 5 describes the lower sales-lower grocery-state real property-title tax scenario. Table 6 describes the lower sales-lower grocery-graduated income tax scenario. We have also broken out the total tax burden under each scenario by its component taxes to show what proportion of the total tax burden comes from each type of tax.
Tables 7-9 display the data from Table 3 and rearrange it to facilitate comparison of each scenario by household type. Table 7 shows the impact of the three scenarios on single adult households with no dependents. Table 8 shows the impact of the three scenarios on single adult households with two dependents. Table 9 shows the impact of the three scenarios on husband/wife households with two dependents.
Charts 1-9 accompany Tables 7-9 to show graphically the progressivity curve for each scenario. Charts 1-3 refer to data in Table 7. Charts 4-6 refer to data in Table 8. Charts 7-9 refer to data in Table 9.
Tax Scenarios Across Income Levels: Progressivity or Regressivity?
�� Status Quo Sales Tax Scenario. This tax results in a regressive tax structure: the higher the income, the lower the tax burden.
If we compare the second lowest and highest income brackets by household type, this pattern becomes strikingly apparent. Husband/wife households with two dependents earning $14,854 pay 11.78 percent of their income in taxes compared to husband/wife households with two dependents earning $140,150, which pay 7.18 percent of their income in taxes. Single adults with two dependents earning $14,854 pay 10.45 percent of their income in taxes, while single adults with two dependents earning $140,150 pay 6.88 percent of their income in taxes. Single adults earning $14,854 pay 8.06 percent of their income in taxes compared to single adults earning $140,150, who pay 6.41 percent of their income in taxes.
In dollar terms, the husband/wife household with two dependents earning $14,854 pays $11.78 of their income in taxes for every $100 earned. By contrast, if that same household were earning $140,150, they would pay $7.18 in taxes for every $100 earned. See Table 3 for more details.
�� Lower Sales-Lower Grocery-State Real Property-Title Tax Scenario. This tax scenario’s results vary by income level.
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For households with incomes between $14,854 and $29,467, this tax scenario is progressive: the higher the income, the higher the tax burden. For households between $29,467 and $140,150, this tax scenario becomes a flat tax: regardless of income, the tax burden from the property tax remains 8.67 percent of income. The big jump in tax burden at $29,467 has to do with the increased likelihood both of home ownership and of the purchase of a car. See Table 3 and Appendix 1 for details.
�� Lower Sales-Lower Grocery-Graduated Income Tax Scenario. This tax scenario is progressive: the higher the income, the higher the tax rate. Also, for this tax scenario, the relative tax rates are significantly lower for every income group and household type than the lower sales-lower grocery-state real property-title tax scenario.
Under the lower sales-lower grocery-graduated income tax scenario, households earning $7,700 pay a high percentage of income because of sales taxes. Households at this income level are exempt from the income tax. See Table 6 for more details.
For households earning $10,000 and above, their tax burdens drop dramatically under this scenario compared to the other two. Single adults earning $14,854 pay 5.21 percent of their income in taxes, while single adults earning $140,150 pay 9.83 percent. Single adults with two dependents earning $14,854 pay 6.49 percent of their income in taxes, while single adults with two dependents earning $140,150 pay 9.50 percent. Husband/wife households with two dependents earning $14,854 pay 7.20 percent of their income in taxes, while single adults with two dependents earning $140,150 pay 9.11 percent. See Table 3 for more details.
Tax Scenarios Within Income Levels: Relative Tax Burdens
�� The highest tax burden falls on households earning $7,700 under the status quo sales tax. This is true for any household type at any income level and for all the scenarios.
Under this scenario, the single adult household pays 14.05 percent of its income in taxes, the single adult with two dependents pays 18.80 percent, and the husband/wife household with two dependents pays 21.40 percent. See Table 3 for more details.
Indeed, households making $7,700 have exorbitant tax burdens regardless of the tax scenario. However, their tax burden decreases markedly under the lower sales-lower grocery-graduated income tax scenario.
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What these findings suggest is that, regardless of the final scenario the TTSSC recommends, the state needs to consider some additional mechanism for providing relief for these households.25
�� The status quo sales tax places the highest tax burden on those earning $14,854 and $20,900, regardless of household type. By contrast, the lower sales-lower grocery-graduated income tax scenario places the lightest burden on these income groups.
Note that for the lower sales-lower grocery-state real property-title tax scenario, the direct tax burden for these income levels in minimal. However, it is likely that these households will be affected indirectly by these taxes in the form of higher rents and higher prices for used or inexpensive cars.
�� The lower sales-lower grocery-state real property-title tax scenario creates an exorbitant tax burden on those earning $29,467 and $44,431, nearly doubling the tax burdens of the other two scenarios.
In these income groups, households have a slightly lower tax burden under the lower sales-lower grocery-graduated income tax scenario than under the status quo sales tax. In other words, for households at these income levels, the lower sales-lower grocery-graduated income tax scenario imposes the lowest tax burden:
o Between 6.49 and 7.19 percent for husband/wife, two dependent households;
o Between 6.49 and 7.62 percent for single parent, two dependent households; and
o Between 7.21 and 8.30 percent for single adult, no dependent households.
�� The lower sales-lower grocery-state real property-title tax scenario creates an exorbitant tax burden on those earning $78,619 and $140,150. For these households, this scenario imposes a tax burden more than twice that of the status quo sales tax and approximately one and one-half times that of the lower sales-lower grocery-graduated income tax scenario.
In these income groups, households have a slightly greater tax burden from the lower sales-lower grocery-graduated income tax scenario than from the status quo sales tax due to the
25 The Consumer Expenditure Survey includes expenditures for food that were purchased with food stamps or WIC vouchers. These purchases would not be taxed in Tennessee, but it was impossible to remove them from our estimates of expenditures for food during this study. The subset of low-income households that use the food stamp and WIC programs would experience some sales tax relief from the fact that these purchases may not be taxed. Page 54 of 118
progressive nature of the income tax. For households at these income groups, the lower sales-lower grocery-graduated income tax scenario imposes the following tax burden:
o Between 8.13 and 9.11 percent for husband/wife, two dependent households;
o Between 8.65 and 9.50 percent for single parent, two dependent households; and
o Between 9.32 and 9.83 percent for single adult, no dependent households.
�� The tax rate for high-income households under any scenario is lower than the tax rate for households earning $7,700 or less. Within the two highest income categories in our study, the highest tax burden for any household is the 17.58 percent paid by husband/wife households with two dependents earning $78,619 under the lower sales-lower grocery-state real property-title tax scenario. This rate is lower than the 21.40 percent that husband/wife households with two dependents earning $7,700 pay under the status quo. It is also lower than the 18.80 percent tax rate single adults with two dependents earning $7,700 pay under the status quo. See Table 3 for more details.
Tax Burden: Relative Contributions of Different Taxes
�� Under all three scenarios, the largest portion of the tax burden comes from the sales tax. These overall results are displayed in Table 3 and disaggregated by the contribution of each type of tax within each tax scenario in Tables 4-6.
Of the low-income households, the husband/wife household has a higher tax burden than the households with a single adult or with a single adult and two dependents, up to and including the household earning $20,900. This finding is plausible because the husband/wife household includes one more adult than the other households with children and at least three more individuals than the single adult household. Thus, within income levels, and with one exception, the husband/wife household with two dependents always has the highest tax burden.
There one exception to this general finding is that under the lower sales-lower grocery-state real property-title tax scenario, the largest portion of the tax burden came from the property tax for households earning $29,467 and up. We assumed that households with incomes of less than $25,000 would not own property. For those households, the sales tax makes up the greatest portion of their tax burdens under the lower sales-lower grocery-state real property-title tax scenario. See Table 5 for more details.
�� Under the lower sales-lower grocery-graduated income tax scenario, the lowest income level that has an income tax burden is the $20,900 single adult household. This household does not have the advantage of an exemption for a second adult or deductions for dependents.
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Single adult households with two dependents begin paying an income tax at incomes of $29,467.
Husband/wife households with two dependents begin paying an income tax at incomes of $44,431. See Table 6 for more details.
�� When we examine the income level at which a household’s tax burden under the lower sales-lower grocery-graduated income tax scenario is greater than under the status quo sales tax scenario, we find the following:
Under the lower sales-lower grocery-graduated income tax scenario, households with children at an income level of $78,619 begin to have a very slightly larger tax burden than under the status quo. At that income level, a husband/wife household with two dependents pays 8.03 percent of its income in taxes under the status quo. If an income tax were implemented, that household would pay 8.13 percent of its income in taxes, an increase of a mere one-tenth of one percent.
Single adult households begin to have a larger tax burden under an income tax scenario than under the status quo at $44,431. At that income level, a single adult household pays 7.51 percent of its income in taxes. If an income tax were implemented, that household would pay 8.30 percent of its income in taxes, an increase of 0.79 percent. A single adult earning $78,619 with two dependents pays 7.63 percent of her income in taxes under the status quo. If an income tax were implemented, that household would pay 8.65 percent of its income in taxes, an increase of 1.02 percent. See Table 3 for more details.
We estimate that households with children with incomes less than $70,000 would pay less under an income tax than they do under the current system. Approximately 80 percent of Tennesseans earn less than $70,000 annually.26
Graphs of Tax Scenarios by Households: Progressivity or Regressivity
�� Charts 1-9 reveal that the tax rate for the $7,700 income group is out of alignment for all households under every scenario. These charts graphically reveal that whatever tax scenario is implemented, households earning $7,700 or less will pay a disproportionate share of their income in taxes relative to any other household at any other income level. These charts offer a clear picture of why the state needs to consider a special mechanism to relieve the exorbitant tax burden on very low-income households.
�� Charts 1, 4 and 7 describe the status quo tax scenario. Chart 1 displays results for single adults with no dependents. Chart 4 displays results for single adults with two
26 Current Population Survey, 2004. Page 56 of 118
dependents. Chart 7 displays results for husband/wife households with two dependents. These charts clearly show that the status quo sales tax is regressive.
�� Charts 2, 5, and 8 describe the lower sales-lower grocery-state real property-title tax scenario. Chart 2 displays results for single adults with no dependents. Chart 5 displays results for single adults with two dependents. Chart 8 displays results for husband/wife households with two dependents.
Charts 2, 5, and 8 clearly show that there are two different effects of this scenario by income level. For those at the lowest income level, this scenario is regressive due to the sales tax that remains a part of this scenario. For those with incomes greater than $25,000, the 8.67 percent property tax makes this scenario a flat tax. However, in conjunction with the other taxes in this scenario, this becomes progressive for those with incomes between $10,000 and $35,000. See Table 5 for more details.
�� Charts 3, 6 and 9 describe the lower sales-lower grocery-graduated income tax scenario. Chart 3 displays results for single adults with no dependents. Chart 6 displays results for single adults with two dependents. Chart 9 displays results for husband/wife households with two dependents.
These charts show that the lower sales-lower grocery-graduated income tax scenario is gradually progressive. However, this scenario is still regressive for households earning $7,700 and below because of the sales tax that remains a part of this scenario.
Impact on Whites
Table 10 shows the impact of all scenarios on white households in Tennessee. In Tables 11-13, we have taken the data from Table 10 and separated it for each tax scenario. We have also broken out the total tax burden under each scenario by its component taxes in order to show what proportion of the total tax burden comes from which type of taxes. In Tables 14-16 we have taken the data from Table 10 and rearranged it to facilitate comparison of each scenario by household type. Tables 14-16 show each white household type at all income levels, and the impact of each scenario on that household type. Charts 10-18 show the progressivity curves for each scenario’s impact on white households, broken down by household type. Charts 10-12 refer to data in Table 14. Charts 13-15 refer to data in Table 15. Charts 16-18 refer to data in Table 16.
The racial/ethnic groups we used were black and white, at the request of the Tax Structure Study Commission. For this analysis, we broke household types into six income categories. Data was not available at the $90,000 and over level broken down by race, but it was available at the $70,000 and over level. Since we were unable to do calculations for the representative households at income level $78,619 or $140,150 by race, we created a new representative household at income $110,173 for the analyses by race. Tables 10-16 and Charts 10-18 thus include the following six representative household income levels: $7,700, $14,854, $20,900, $29,467, $44,431, and $110,173.
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Impact on Blacks
Table 17 shows the impact of all scenarios on black households in Tennessee. In Tables 18-20, we have taken the data from Table 17 and separated it for each tax scenario. We have also broken out the total tax burden under each scenario by its component taxes in order to show what proportion of the total tax burden comes from which type of taxes. In Tables 21-23 we have taken the data from Table 17 and rearranged it to facilitate comparison of each scenario by household type. Tables 17-23 show each black household type at all income levels, and the impact of each scenario on that household type. Charts 19-27 show the progressivity curves for each scenario’s impact on black households, broken down by household type. Charts 19-21 refer to data in Table 21. Charts 22-24 refer to data in Table 22. Charts 25-27 refer to data in Table 23. Tables 17-23 and Charts 19-27 include the following six representative household income levels: $7,700, $14,854, $20,900, $29,467, $44,431, and $110,173.
A full discussion of our findings by race can be found in the W-SPARC working paper amplifying this report. This will be available on the W-SPARC website at www.wsparc.org in January 2005.
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CONCLUSIONS
The findings above support the following conclusions:
By income level:
�� Households with children and incomes less than $70,000 would pay less under an income tax than they do under the existing system. Approximately 80 percent of people in Tennessee earn less than $70,000 annually.27
�� Low-income households suffer an extremely high tax burden from the status quo sales tax.
Under the status quo sales tax structure, low-income households of all types pay a larger share of their income in taxes than high-income households. The amount of revenue generated from these households is not high, but it is a significant proportion of the income available to these households.
Moreover, in recent years, the average income of low-income households in Tennessee has declined while the income of wealthy households has increased, making the status quo sales tax structure even more regressive.28
The poor will continue to pay a disproportionately high percentage of their income in taxes under any scenario compared to those earning higher incomes, unless some kind of refundable credit is enacted.
�� Households with children and incomes of $44,431 or less would pay a smaller proportion of their income in taxes with the scenario that includes a graduated income tax than with a scenario that taxes sales alone or a scenario that taxes titled vehicles and real property.
�� Households earning $78,619 and above would pay only a slightly higher proportion of their income under the lower sales-lower grocery-graduated income tax scenario than they do under the status quo sales tax. These households would also pay less under a scenario that includes a graduated income tax than they would under one that includes a state tax on real property and titled vehicles.
By tax scenario:
�� The percentage of income taxed for high-income households under any scenario is lower than the percentage of income low-income households pay in taxes.
�� More than half of almost every household’s tax burden comes from the sales tax under both the status quo sales tax scenario and the lower sales-lower grocery-graduated income tax scenario.
�� Under the lower sales-lower grocery-state real property-title tax scenario, the largest portion of the tax burden comes from the property tax for those households assumed to own property.
The property tax is a flat tax for households earning above $25,000. We assumed that households earning less than $25,000 would not own property and therefore not pay a
27 Current Population Survey, 2004. 28 Bernstein et al, 2002. Page 59 of 118
property tax. If this lower income group did own property, they too would pay an additional 8.67 percent in taxes.
By gender and race:
�� The burden of paying sales tax in Tennessee falls disproportionately on women, who are more likely to be in low-income brackets. This is especially true for single women with children. Of households with children in Tennessee, 23 percent are headed by single women; almost 60 percent of these single mothers earn less than $20,000 per year.29
�� The tax burden falls disproportionately on people of color, because they too are concentrated in lower-income brackets. One-third of African-Americans in Tennessee earn less than $10,000 per year, and two-thirds earn less than $25,000 per year. Nearly 52 percent of Hispanic households in Tennessee earn less than $25,000 per year. One third of Tennessee’s Native American households earn less than $25,000 per year.30
29 U.S. Census 2000; Current Population Survey 1998, 1999, 2000. 30 Caizza, 2000. Page 60 of 118
SOURCES
Bahizi, Pierre. 2003. “Retirement expenditures for Whites, Blacks, and persons of Hispanic origin.” Monthly Labor Review 126(6): 20-22.
Brayfield, April and Sandra Hofferth. 1995. “Balancing the Family Budget: Differences in Child Care Expenditures by Race, Ethnicity, Economic Status, and Family Structure.” Social Science Quarterly 76(1): 158—177.
Bernstein, Jared, Heather Boushey, Elizabeth McNichol, and Robert Zahradnik. 2002. Pulling Apart: A State by State Analysis of Income Trends. Washington, D.C.: Center on Budget and Policy Priorities and Economic Policy Institute.
Caiazza, Amy B., Ed. 2000. The Status of Women in Tennessee. Washington, D.C.: Institute for Women’s Policy Research.
Cicarelli, James. 1974. “On Income, Race, and Consumer Behavior.” The American Journal of Economics and Sociology 33(3): 243—247.
Cohen, Phillip. 1998. “Replacing Housework in the Service Economy: Gender, Class, and Race-Ethnicity in Service Spending.” Gender and Society 12(2): 219—231.
Conley, Dalton. 1999. Being Black, Living in the Red: Race, Wealth and Social Policy in America. Berkeley, CA: University of California Press.
Kivett, Vira and Frankie Schwenk. 1994. “The Consumer Expenditures of Elderly Women: Racial, Marital, and Rural/Urban Impacts.” Journal of Family and Economic Issues 15(3): 261—277.
Oliver, Melvin L. and Thomas M. Shapiro. 1995. Black Wealth/White Wealth. New York, NY: Routledge.
U.S. Department of Commerce, U.S. Census Bureau and U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey, 1998.
U.S. Department of Commerce, U.S. Census Bureau and U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey, 1999.
U.S. Department of Commerce, U.S. Census Bureau and U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey, 2000.
U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, 1999.
U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, 2001.
U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, 2002.
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TABLE 1: Differences between the 2001 and the 2004 Tax Impact Studies
Difference 2001 Study 2004 Study
We shifted from a focus on women to a focus on households. Women were the central population being studied. Representative households and income levels were identified based on CPS data on the distribution of women in Tennessee. Per the TTSSC’s request, the central population being studied in 2004 was Tennessee households. Representative household types and income levels were identified based on CPS data on the distribution of the Tennessee population as a whole, rather than the distribution of women alone. In this study, women are subsumed into the figures on households.
We updated the demographic data from which representative households were selected. Based on the Current Population Survey for 1998 to 2000. We combined data on Tennessee from these years in order to get a large enough sample to make meaningful generalizations. Selection of representative households was based on the Current Population Survey for 2000 to 2002. Again, we combined data on Tennessee from these years in order to get a large enough sample to make meaningful generalizations.
We updated expenditure figures to capture more accurately the distributional effect of differing sales tax scenarios. The Consumer Expenditure Survey (CES) was used to estimate the representative households’ expenditures. The sales tax rates from each tax scenario were then applied to the expenditure figures to calculate each household’s sales tax burdens. In the 2001 study, CES data were from 1999. The Consumer Expenditure Survey was used to estimate the representative households’ expenditures. The sales tax rates from each tax scenario were then applied to the expenditure figures to calculate each household’s sales tax burdens. The 2004 study used CES data from 2001-2002.
We incorporated race into the analysis to examine the differential effects of various tax scenarios on households by race. Race was not incorporated. CPS data on the distribution of households in Tennessee by race were used to identify what percentage of whites and blacks fell into each of the representative household categories. See Table 2 for more information on the distribution of households in Tennessee by race. In addition, data on expenditures from the 2002 CES were used to determine any race differences in spending that might make the sales tax burden vary by race.
We examined a different set of scenarios developed by the TTSSC. Analyzed the status quo tax system, a tax on sales and services, and a graduated income tax. Studied the status quo, a tax on property and vehicles with a reduced sales tax, and a graduated income tax with a reduced sales tax and a reduced tax on groceries. The scenarios we studied in 2004 are outlined in detail in Appendix 2.
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TABLE 2: Tennessee Distribution of Income & Household Type by Race31
Income Range / Representative Income Household Type % White32 % Black
$0-$9,999 SiRepresentative Income: $7,700 Single adult, no dependents 3.28% 2.06%
ngle parent, two dependents 2.02% 6.61%
Husband/Wife, two dependents 2.52% 1.14%
$10,001 - $17,999 SiRepresentative Income: $14,854 Single adult, no dependents 2.90% 1.69%
ngle parent, two dependents 2.15% 13.21%
Husband/Wife, two dependents 4.50% 1.86%
$18,000 - $24,999 SiRepresentative Income: $20,900 Single adult, no dependents 1.63% 1.11%
ngle parent, two dependents 1.75% 6.58%
Husband/Wife, two dependents 3.97% 4.65%
$25,000 - $34,999 SiRepresentative Income: $29,467 Single adult, no dependents 2.17% 2.68%
ngle parent, two dependents 2.03% 5.64%
Husband/Wife, two dependents 9.90% 3.61%
$35,000 - $49,999 SiRepresentative Income: $44,431 Single adult, no dependents 1.82% 1.88%
ngle parent, two dependents 2.57% 10.15%
Husband/Wife, two dependents 12.51% 9.37%
$50,000 - $99,999 SiRepresentative Income: $78,619 Single adult, no dependents 2.04% 1.51%
ngle parent, two dependents 3.13% 4.89%
Husband/Wife, two dependents 25.50% 16.38%
$100,000 + SiRepresentative Income: $140,150 Single adult, no dependents 0.56% 0.07%
ngle parent, two dependents 0.57% 0.00%
Husband/Wife, two dependents 12.48% 4.90%
31 Ibid. 32 Percent of total population of racial group falling within this income level and household type. Page 63 of 118
TABLE 3: Total Tax Burden by Scenario, Income Level & Household Type33
Income Range / Representative Income Household Type Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$0-$9,999 SiRepresentative Income: $7,700 Single adult, no dependents 14.05% 9.93%a 8.82%
ngle parent, two dependents 18.80% 12.45%a 11.34%
Husband/Wife, two dependents 21.40% 13.85%a 12.74%
$10,001 - $17,999 SiRepresentative Income: $14,854 Single adult, no dependents 8.06% 6.31%a 5.21%
ngle parent, two dependents 10.45% 7.59%a 6.49%
Husband/Wife, two dependents 11.78% 8.30%a 7.20%
$18,000 - $24,999 SiRepresentative Income: $20,900 Single adult, no dependents 8.70% 7.02%a 6.92%
ngle parent, two dependents 10.49% 7.98%a 6.89%
Husband/Wife, two dependents 11.48% 8.52%a 7.43%
$25,000 - $34,999 SiRepresentative Income: $29,467 Single adult, no dependents 7.67% 16.20% 7.21%
ngle parent, two dependents 8.96% 16.90% 6.49%
Husband/Wife, two dependents 9.69% 17.31% 6.49%
$35,000 - $49,999 SiRepresentative Income: $44,431 Single adult, no dependents 7.51% 16.27% 8.30%
ngle parent, two dependents 8.53% 16.82% 7.62%
Husband/Wife, two dependents 9.12% 17.15% 7.19%
$50,000 - $99,999 SiRepresentative Income: $78,619 Single adult, no dependents 6.96% 16.99% 9.32%
ngle parent, two dependents 7.63% 17.36% 8.65%
Husband/Wife, two dependents 8.03% 17.58% 8.13%
$100,000 + SiRepresentative Income: $140,150 Single adult, no dependents 6.41% 16.60% 9.83%
ngle parent, two dependents 6.88% 16.86% 9.50%
Husband/Wife, two dependents 7.18% 17.03% 9.11%
33 Tax Burdens represented as percent of income spent on taxes. a We assumed that households with incomes below $25,000 would not own property. These households would not experience a tax burden directly from the property tax. However, if the lower sales-lower grocery-state real property-title tax scenario were implemented, these households would likely experience the property tax indirectly through increases in rent. While these households may not experience an increase in tax burden under the lower sales-lower grocery-state real property-title tax scenario, they may experience an increase in expenses. Page 64 of 118
TABLE 4: Tax Burden by Income and Household Type for Status Quo Tax Scenario34
Income Level Household Type Sales Tax Burden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 14.05% 0.00% 14.05%
Single parent, two dependents, earning $7,700 18.80% 0.00% 18.80%
Husband/Wife, two dependents, earning $7,700 21.40% 0.00% 21.40%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 8.06% 0.00% 8.06%
Single parent, two dependents, earning $14,854 10.45% 0.00% 10.45%
Husband/Wife, two dependents, earning $14,854 11.78% 0.00% 11.78%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 8.70% 0.00% 8.70%
Single parent, two dependents, earning $20,900 10.49% 0.00% 10.49%
Husband/Wife, two dependents, earning $20,900 11.48% 0.00% 11.48%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 7.67% 0.00% 7.67%
Single parent, two dependents, earning $29,467 8.96% 0.00% 8.96%
Husband/Wife, two dependents, earning $29,467 9.69% 0.00% 9.69%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 7.51% 0.00% 7.51%
Single parent, two dependents, earning $44,431 8.53% 0.00% 8.53%
Husband/Wife, two dependents, earning $44,431 9.12% 0.00% 9.12%
$50,000 - $99,999 Single adult, no dependents, earning $78,619 6.96% 0.00% 6.96%
Single parent, two dependents, earning $78,619 7.63% 0.00% 7.63%
Husband/Wife, two dependents, earning $78,619 8.03% 0.00% 8.03%
$100,000 + Single adult, no dependents, earning $140,150 6.41% 0.00% 6.41%
Single parent, two dependents, earning $140,150 6.88% 0.00% 6.88%
Husband/Wife, two dependents, earning $140,150 7.18% 0.00% 7.18%
34 Tax Burdens represented as percent of income spent on taxes. Page 65 of 118
TABLE 5: Tax Burden by Income & Household Type for Lower Sales-Lower Grocery-State Real Property-Title Tax Scenario35
Income Level Household Type Vehicle Tax Burden Sales Tax Burden Property Tax Burden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 1.11% 8.82% 0.00% 0.00% 9.93%
Single parent, two dependents, earning $7,700 1.11% 11.34% 0.00% 0.00% 12.45%
Husband/Wife, two dependents, earning $7,700 1.11% 12.74% 0.00% 0.00% 13.85%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 1.10% 5.21% 0.00% 0.00% 6.31%
Single parent, two dependents, earning $14,854 1.10% 6.49% 0.00% 0.00% 7.59%
Husband/Wife, two dependents, earning $14,854 1.10% 7.20% 0.00% 0.00% 8.30%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 1.09% 5.93% 0.00% 0.00% 7.02%
Single parent, two dependents, earning $20,900 1.09% 6.89% 0.00% 0.00% 7.98%
Husband/Wife, two dependents, earning $20,900 1.09% 7.43% 0.00% 0.00% 8.52%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 2.15% 5.38% 8.67% 0.00% 16.20%
Single parent, two dependents, earning $29,467 2.15% 6.08% 8.67% 0.00% 16.90%
Husband/Wife, two dependents, earning $29,467 2.15% 6.49% 8.67% 0.00% 17.31%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 2.11% 5.49% 8.67% 0.00% 16.27%
Single parent, two dependents, earning $44,431 2.11% 6.04% 8.67% 0.00% 16.82%
Husband/Wife, two dependents, earning $44,431 2.11% 6.37% 8.67% 0.00% 17.15%
$50,000 - $99,999 Single adult, no dependents, earning $78,619 3.12% 5.20% 8.67% 0.00% 16.99%
Single parent, two dependents, earning $78,619 3.12% 5.57% 8.67% 0.00% 17.36%
Husband/Wife, two dependents, earning $78,619 3.12% 5.79% 8.67% 0.00% 17.58%
$100,000 + Single adult, no dependents, earning $140,150 3.05% 4.88% 8.67% 0.00% 16.60%
Single parent, two dependents, earning $140,150 3.05% 5.14% 8.67% 0.00% 16.86%
Husband/Wife, two dependents, earning $140,150 3.05% 5.31% 8.67% 0.00% 17.03%
35 Tax Burdens represented as percent of income spent on taxes. Page 66 of 118
TABLE 6: Tax Burden by Income & Household Type for Lower Sales-Lower Grocery-Graduated Income Tax Scenario36
Income Level Household Type Sales Tax Burden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 8.82% 0.00% 8.82%
Single parent, two dependents, earning $7,700 11.34% 0.00% 11.34%
Husband/Wife, two dependents, earning $7,700 12.74% 0.00% 12.74%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 5.21% 0.00% 5.21%
Single parent, two dependents, earning $14,854 6.49% 0.00% 6.49%
Husband/Wife, two dependents, earning $14,854 7.20% 0.00% 7.20%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 5.93% 0.99% 6.92%
Single parent, two dependents, earning $20,900 6.89% 0.00% 6.89%
Husband/Wife, two dependents, earning $20,900 7.43% 0.00% 7.43%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 5.38% 1.83% 7.21%
Single parent, two dependents, earning $29,467 6.08% 0.41% 6.49%
Husband/Wife, two dependents, earning $29,467 6.49% 0.00% 6.49%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 5.49% 2.81% 8.30%
Single parent, two dependents, earning $44,431 6.04% 1.58% 7.62%
Husband/Wife, two dependents, earning $44,431 6.37% 0.82% 7.19%
$50,000 - $99,999 Single adult, no dependents, earning $78,619 5.20% 4.12% 9.32%
Single parent, two dependents, earning $78,619 5.57% 3.08% 8.65%
Husband/Wife, two dependents, earning $78,619 5.79% 2.34% 8.13%
$100,000 + Single adult, no dependents, earning $140,150 4.88% 4.95% 9.83%
Single parent, two dependents, earning $140,150 5.14% 4.36% 9.50%
Husband/Wife, two dependents, earning $140,150 5.31% 3.80% 9.11%
36 Tax Burdens represented as percent of income spent on taxes.
TABLE 7: Tax Burden by Scenario on Single Adult Households with No Dependents, All Races
Income Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$ 7,700.00 14.05% 9.93% 8.82%
$ 14,854.00 8.06% 6.31% 5.21%
$ 20,900.00 8.70% 7.02% 6.92%
$ 29,467.00 7.67% 16.20% 7.21%
$ 44,431.00 7.51% 16.27% 8.30%
$ 78,619.00 6.96% 16.99% 9.32%
$ 140,150.00 6.41% 16.60% 9.83%
CHARTS 1-3:
Progressivity of Tax Scenarios for Single Adults with No Dependents, All Races Status Quo 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% $- $25 $50 $75 $100 $125 $150 Thousands Income Total Tax Burden Page 67 of 118
TABLE 8: Tax Burden by Scenario on Single Adult Households with Two Dependents, All Races
Income Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Inc/ Red. Food
$ 7,700.00 18.80% 12.45% 11.34%
$ 14,854.00 10.45% 7.59% 6.49%
$ 20,900.00 10.49% 7.98% 6.89%
$ 29,467.00 8.96% 16.90% 6.49%
$ 44,431.00 8.53% 16.82% 7.62%
$ 78,619.00 7.63% 17.36% 8.65%
$ 140,150.00 6.88% 16.86% 9.50%
CHARTS 4-6:
Progressivity of Tax Scenarios for Single Adults with Two Dependents, All Races Page 68 of 118
TABLE 9: Tax Burden by Scenario on Husband/Wife Households with Two Dependents, All Races
Income Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$ 7,700.00 21.40% 13.85% 12.74%
$ 14,854.00 11.78% 8.30% 7.20%
$ 20,900.00 11.48% 8.52% 7.43%
$ 29,467.00 9.69% 17.31% 6.49%
$ 44,431.00 9.12% 17.15% 7.19%
$ 78,619.00 8.03% 17.58% 8.13%
$ 140,150.00 7.18% 17.03% 9.11%
CHARTS 7-9:
Progressivity of Tax Scenarios for Husband/Wife Households with Two Dependents, All Races Status Quo 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% $- $25 $50 $75 $100 $125 $150 Thousands Income Total Tax Burden Page 69 of 118
Page 70 of 118
$0-$9,999 Representative Income: $7,700 Single adult, no dependents 13.61% 9.68% 8.57%
Single parent, two dependents 18.02% 12.03% 10.92%
Husband/Wife, two dependents 20.39% 13.30% 12.19%
$10,001 - $17,999 Representative Income: $14,854 Single adult, no dependents 7.63% 6.05% 4.95%
Single parent, two dependents 9.85% 7.22% 6.12%
Husband/Wife, two dependents 11.05% 7.86% 6.76%
$18,000 - $24,999 Representative Income: $20,900 Single adult, no dependents 8.43% 6.86% 6.76%
Single parent, two dependents 10.15% 7.77% 6.68%
Husband/Wife, two dependents 11.08% 8.27% 7.18%
$25,000 - $34,999 Representative Income: $29,467 Single adult, no dependents 7.44% 16.06% 7.07%
Single parent, two dependents 8.65% 16.71% 6.30%
Husband/Wife, two dependents 9.31% 17.08% 6.26%
$35,000 - $49,999 Representative Income: $44,431 Single adult, no dependents 7.30% 16.14% 8.17%
Single parent, two dependents 8.25% 16.65% 7.45%
Husband/Wife, two dependents 8.78% 16.94% 6.98%
$100,000 + Representative Income: $110,173 Single adult, no dependents 6.73% 17.09% 9.83%
Single parent, two dependents 7.22% 17.36% 9.35%
Husband/Wife, two dependents 7.51% 17.52% 8.99%
TABLE 10: Total Tax Burden on Whites by Scenario, Income Level and Household Type Income Range / Representative Income Household Type Status Quo
Low Sales/Groc/Inc
Low Sales/ Groc/ State Real Prop/Title
Page 71 of 118
TABLE 11: Tax Burden on Whites by Income and Household Type for Status Quo Tax Scenario
Income Level Household Type Sales TaxBurden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 13.61% 0.00% 13.61%
Single parent, two dependents, earning $7,700 18.02% 0.00% 18.02%
Husband/Wife, two dependents, earning $7,700 20.39% 0.00% 20.39%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 7.63% 0.00% 7.63%
Single parent, two dependents, earning $14,854 9.85% 0.00% 9.85%
Husband/Wife, two dependents, earning $14,854 11.05% 0.00% 11.05%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 8.43% 0.00% 8.43%
Single parent, two dependents, earning $20,900 10.15% 0.00% 10.15%
Husband/Wife, two dependents, earning $20,900 11.08% 0.00% 11.08%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 7.44% 0.00% 7.44%
Single parent, two dependents, earning $29,467 8.65% 0.00% 8.65%
Husband/Wife, two dependents, earning $29,467 9.31% 0.00% 9.31%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 7.30% 0.00% 7.30%
Single parent, two dependents, earning $44,431 8.25% 0.00% 8.25%
Husband/Wife, two dependents, earning $44,431 8.78% 0.00% 8.78%
$100,000 + Single adult, no dependents, earning $110,173 6.73% 0.00% 6.73%
Single parent, two dependents, earning $110,173 7.22% 0.00% 7.22%
Husband/Wife, two dependents, earning $110,173 7.51% 0.00% 7.51%
Page 72 of 118
TABLE 12: Tax Burden on Whites by Income and Household Type for Lower Sales-Lower Grocery-State Real Property-Title Tax Scenario
Income Level Household Type Vehicle Tax Burdena Sales Tax Burden Property Tax Burden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 1.11% 8.57% 0.00% 0.00% 9.68%
Single parent, two dependents, earning $7,700 1.11% 10.92% 0.00% 0.00% 12.03%
Husband/Wife, two dependents, earning $7,700 1.11% 12.19% 0.00% 0.00% 13.30%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 1.10% 4.95% 0.00% 0.00% 6.05%
Single parent, two dependents, earning $14,854 1.10% 6.12% 0.00% 0.00% 7.22%
Husband/Wife, two dependents, earning $14,854 1.10% 6.76% 0.00% 0.00% 7.86%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 1.09% 5.77% 0.00% 0.00% 6.86%
Single parent, two dependents, earning $20,900 1.09% 6.68% 0.00% 0.00% 7.77%
Husband/Wife, two dependents, earning $20,900 1.09% 7.18% 0.00% 0.00% 8.27%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 2.15% 5.24% 8.67% 0.00% 16.06%
Single parent, two dependents, earning $29,467 2.15% 5.89% 8.67% 0.00% 16.71%
Husband/Wife, two dependents, earning $29,467 2.15% 6.26% 8.67% 0.00% 17.08%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 2.11% 5.36% 8.67% 0.00% 16.14%
Single parent, two dependents, earning $44,431 2.11% 5.87% 8.67% 0.00% 16.65%
Husband/Wife, two dependents, earning $44,431 2.11% 6.16% 8.67% 0.00% 16.94%
$100,000 + Single adult, no dependents, earning $110,173 3.25% 5.17% 8.67% 0.00% 17.09%
Single parent, two dependents, earning $110,173 3.25% 5.44% 8.67% 0.00% 17.36%
Husband/Wife, two dependents, earning $110,173 3.25% 5.60% 8.67% 0.00% 17.52%
Page 73 of 118
TABLE 13: Tax Burden on Whites by Income and Household Type for Lower Sales-Lower Grocery-Graduated Income Tax Scenario
Income Level Household Type Sales TaxBurden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 8.57% 0.00% 8.57%
Single parent, two dependents, earning $7,700 10.92% 0.00% 10.92%
Husband/Wife, two dependents, earning $7,700 12.19% 0.00% 12.19%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 4.95% 0.00% 4.95%
Single parent, two dependents, earning $14,854 6.12% 0.00% 6.12%
Husband/Wife, two dependents, earning $14,854 6.76% 0.00% 6.76%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 5.77% 0.99% 6.76%
Single parent, two dependents, earning $20,900 6.68% 0.00% 6.68%
Husband/Wife, two dependents, earning $20,900 7.18% 0.00% 7.18%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 5.24% 1.83% 7.07%
Single parent, two dependents, earning $29,467 5.89% 0.41% 6.30%
Husband/Wife, two dependents, earning $29,467 6.26% 0.00% 6.26%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 5.36% 2.81% 8.17%
Single parent, two dependents, earning $44,431 5.87% 1.58% 7.45%
Husband/Wife, two dependents, earning $44,431 6.16% 0.82% 6.98%
$100,000 + Single adult, no dependents, earning $110,173 5.17% 4.66% 9.83%
Single parent, two dependents, earning $110,173 5.44% 3.91% 9.35%
Husband/Wife, two dependents, earning $110,173 5.60% 3.39% 8.99%
TABLE 14: Total Tax Burden on Whites by Scenario, Income Level and Household Type White Single Adults, No Dependents
Income Range Representative Income Household Type Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$0-$9,999 $7,700 Single adult, no dependents 13.61% 9.68% 8.57%
$10,001 - $17,999 $14,854 Single adult, no dependents 7.63% 6.05% 4.95%
$18,000 - $24,999 $20,900 Single adult, no dependents 8.43% 6.86% 6.76%
$25,000 - $34,999 $29,467 Single adult, no dependents 7.44% 16.06% 7.07%
$35,000 - $49,999 $44,431 Single adult, no dependents 7.30% 16.14% 8.17%
$100,000 + $110,173 Single adult, no dependents 6.73% 17.09% 9.83%
CHARTS 10-12: Progressivity of Tax Scenarios for Single Adults with No Dependents, Whites Status Quo 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%$0 $25 $50 $75 $100 $125 $150 Thousands Income Total Tax Burden Page 74 of 118
TABLE 15: Total Tax Burden on Whites by Scenario, Income Level and Household Type White Single Adults, Two Dependents
Income Range Representative Income Household Type Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$0-$9,999 $7,700 Single adult, two dependents 18.02% 12.03% 10.92%
$10,001 - $17,999 $14,854 Single adult, two dependents 9.85% 7.22% 6.12%
$18,000 - $24,999 $20,900 Single adult, two dependents 10.15% 7.77% 6.68%
$25,000 - $34,999 $29,467 Single adult, two dependents 8.65% 16.71% 6.30%
$35,000 - $49,999 $44,431 Single adult, two dependents 8.25% 16.65% 7.45%
$100,000 + $110,173 Single adult, two dependents 7.22% 17.36% 9.35%
CHARTS 13-15:
Progressivity of Tax Scenarios for Single Adults, Two Dependents, WhitePage 75 of 118
TABLE 16: Total Tax Burden on Whites by Scenario, Income Level and Household Type White Husband/Wife, Two Dependents
Income Range Representative Income Household Type Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$0-$9,999 $7,700 Husband/Wife, two dependents 20.39% 13.30% 12.19%
$10,001 - $17,999 $14,854 Husband/Wife, two dependents 11.05% 7.86% 6.76%
$18,000 - $24,999 $20,900 Husband/Wife, two dependents 11.08% 8.27% 7.18%
$25,000 - $34,999 $29,467 Husband/Wife, two dependents 9.31% 17.08% 6.26%
$35,000 - $49,999 $44,431 Husband/Wife, two dependents 8.78% 16.94% 6.98%
$100,000 + $110,173 Husband/Wife, two dependents 7.51% 17.52% 8.99%
CHARTS 16-18: Progressivity of Tax Scenarios for Husband/Wife Households with Two Dependents, White Status Quo 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%$0 $25 $50 $75 $100 $125 $150 Thousands Income Total Tax Burden Page 76 of 118
Page 77 of 118
TABLE 17: Total Tax Burden on Blacks by Scenario, Income Level and Household Type
Income Range / Representative Income Household Type Status Quo Low Sales/ Groc/ State Real Prop/Title37 Low Sales/Groc/Inc
$0-$9,999 Representative Income: $7,700 Single adult, no dependents 12.26% 8.82% 7.71%
Single parent, two dependents 16.63% 11.09% 9.98%
Husband/Wife, two dependents 18.92% 12.28% 11.17%
$10,001 - $17,999 Representative Income: $14,854 Single adult, no dependents 6.86% 5.57% 4.47%
Single parent, two dependents 9.09% 6.72% 5.62%
Husband/Wife, two dependents 10.27% 7.33% 6.23%
$18,000 - $24,999 Representative Income: $20,900 Single adult, no dependents 7.43% 6.84% 6.16%
Single parent, two dependents 8.79% 7.56% 5.89%
Husband/Wife, two dependents 9.52% 7.95% 6.28%
$25,000 - $34,999 Representative Income: $29,467 Single adult, no dependents 6.73% 15.64% 6.65%
Single parent, two dependents 7.75% 16.19% 5.78%
Husband/Wife, two dependents 8.33% 16.50% 5.68%
$35,000 - $49,999 Representative Income: $44,431 Single adult, no dependents 6.65% 15.75% 7.78%
Single parent, two dependents 7.36% 16.13% 6.93%
Husband/Wife, two dependents 7.78% 16.36% 6.40%
$100,000 + Representative Income: $110,173 Single adult, no dependents 5.91% 16.52% 9.22%
Single parent, two dependents 6.35% 16.76% 8.71%
Husband/Wife, two dependents 6.62% 16.91% 8.34%
37 Black households experience redlining, differential loans for vehicles, and other forms of discrimination that would differentiate their expenditures on property and vehicles from that of whites (Conley, 1999; Oliver & Shapiro, 1995). These trends could lower black expenditures on property and vehicles and thus decrease their direct tax burden from property and title taxes in comparison to whites. Precise estimates of these differences were beyond the scope of this study. Page 78 of 118
TABLE 18: Tax Burden on Blacks by Income and Household Type for Status Quo Tax Scenario
Income Level Household Type Sales Tax Burden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 12.26% 0.00% 12.26%
Single parent, two dependents, earning $7,700 16.63% 0.00% 16.63%
Husband/Wife, two dependents, earning $7,700 18.92% 0.00% 18.92%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 6.86% 0.00% 6.86%
Single parent, two dependents, earning $14,854 9.09% 0.00% 9.09%
Husband/Wife, two dependents, earning $14,854 10.27% 0.00% 10.27%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 7.43% 0.00% 7.43%
Single parent, two dependents, earning $20,900 8.79% 0.00% 8.79%
Husband/Wife, two dependents, earning $20,900 9.52% 0.00% 9.52%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 6.73% 0.00% 6.73%
Single parent, two dependents, earning $29,467 7.75% 0.00% 7.75%
Husband/Wife, two dependents, earning $29,467 8.33% 0.00% 8.33%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 6.65% 0.00% 6.65%
Single parent, two dependents, earning $44,431 7.36% 0.00% 7.36%
Husband/Wife, two dependents, earning $44,431 7.78% 0.00% 7.78%
$100,000 + Single adult, no dependents, earning $110,173 5.91% 0.00% 5.91%
Single parent, two dependents, earning $110,173 6.35% 0.00% 6.35%
Husband/Wife, two dependents, earning $110,173 6.62% 0.00% 6.62%
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TABLE 19: Tax Burden on Blacks by Income and Household Type for Lower Sales-Lower Grocery-State Real Property-Title Tax Scenario
Income Level Household Type Vehicle Tax Burden Sales Tax Burden Property Tax Burden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 1.11% 7.71% 0.00% 0.00% 8.82%
Single parent, two dependents, earning $7,700 1.11% 9.98% 0.00% 0.00% 11.09%
Husband/Wife, two dependents, earning $7,700 1.11% 11.17% 0.00% 0.00% 12.28%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 1.10% 4.47% 0.00% 0.00% 5.57%
Single parent, two dependents, earning $14,854 1.10% 5.62% 0.00% 0.00% 6.72%
Husband/Wife, two dependents, earning $14,854 1.10% 6.23% 0.00% 0.00% 7.33%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 1.09% 5.75% 0.00% 0.00% 6.84%
Single parent, two dependents, earning $20,900 1.09% 6.47% 0.00% 0.00% 7.56%
Husband/Wife, two dependents, earning $20,900 1.09% 6.86% 0.00% 0.00% 7.95%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 2.15% 4.82% 8.67% 0.00% 15.64%
Single parent, two dependents, earning $29,467 2.15% 5.37% 8.67% 0.00% 16.19%
Husband/Wife, two dependents, earning $29,467 2.15% 5.68% 8.67% 0.00% 16.50%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 2.11% 4.97% 8.67% 0.00% 15.75%
Single parent, two dependents, earning $44,431 2.11% 5.35% 8.67% 0.00% 16.13%
Husband/Wife, two dependents, earning $44,431 2.11% 5.58% 8.67% 0.00% 16.36%
$100,000+ Single adult, no dependents, earning $110,173 3.29% 4.56% 8.67% 0.00% 16.52%
Single parent, two dependents, earning $110,173 3.29% 4.80% 8.67% 0.00% 16.76%
Husband/Wife, two dependents, earning $110,173 3.29% 4.95% 8.67% 0.00% 16.91%
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TABLE 20: Tax Burden on Blacks by Income and Household Type for Lower Sales-Lower Grocery-Graduated Income Tax Scenario
Income Level Household Type Sales Tax Burden Income Tax Burden Total Tax Burden
$0-$9,999 Single adult, no dependents, earning $7,700 7.71% 0.00% 7.71%
Single parent, two dependents, earning $7,700 9.98% 0.00% 9.98%
Husband/Wife, two dependents, earning $7,700 11.17% 0.00% 11.17%
$10,001 - $17,999 Single adult, no dependents, earning $14,854 4.47% 0.00% 4.47%
Single parent, two dependents, earning $14,854 5.62% 0.00% 5.62%
Husband/Wife, two dependents, earning $14,854 6.23% 0.00% 6.23%
$18,000 - $24,999 Single adult, no dependents, earning $20,900 5.17% 0.99% 6.16%
Single parent, two dependents, earning $20,900 5.89% 0.00% 5.89%
Husband/Wife, two dependents, earning $20,900 6.28% 0.00% 6.28%
$25,000 - $34,999 Single adult, no dependents, earning $29,467 4.82% 1.83% 6.65%
Single parent, two dependents, earning $29,467 5.37% 0.41% 5.78%
Husband/Wife, two dependents, earning $29,467 5.68% 0.00% 5.68%
$35,000 - $49,999 Single adult, no dependents, earning $44,431 4.97% 2.81% 7.78%
Single parent, two dependents, earning $44,431 5.35% 1.58% 6.93%
Husband/Wife, two dependents, earning $44,431 5.58% 0.82% 6.40%
$100,000 + Single adult, no dependents, earning $110,173 4.56% 4.66% 9.22%
Single parent, two dependents, earning $110,173 4.80% 3.91% 8.71%
Husband/Wife, two dependents, earning $110,173 4.95% 3.39% 8.34%
TABLE 21: Total Tax Burden on Blacks by Scenario, Income Level and Household Type Black Single Adults, No Dependents
Income Range Representative Income Household Type Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$0-$9,999 $7,700 Single adult, no dependents 12.26% 8.82% 7.71%
$10,001 - $17,999 $14,854 Single adult, no dependents 6.86% 5.57% 4.47%
$18,000 - $24,999 $20,900 Single adult, no dependents 7.43% 6.84% 6.16%
$25,000 - $34,999 $29,467 Single adult, no dependents 6.73% 15.64% 6.65%
$35,000 - $49,999 $44,431 Single adult, no dependents 6.65% 15.75% 7.78%
$100,000 + $110,173 Single adult, no dependents 5.91% 16.52% 9.22%
CHARTS 19-21:
Progressivity of Tax Scenarios for Single Adults with No Dependents, Black Page 81 of 118
TABLE 22: Total Tax Burden on Blacks by Scenario, Income Level and Household Type Black Single Adults, Two Dependents
Income Range Representative Income Household Type Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$0-$9,999 $7,700 Single adult, two dependents 16.63% 11.09% 9.98%
$10,001 - $17,999 $14,854 Single adult, two dependents 9.09% 6.72% 5.62%
$18,000 - $24,999 $20,900 Single adult, two dependents 8.79% 7.56% 5.89%
$25,000 - $34,999 $29,467 Single adult, two dependents 7.75% 16.19% 5.78%
$35,000 - $49,999 $44,431 Single adult, two dependents 7.36% 16.13% 6.93%
$100,000 + $110,173 Single adult, two dependents 6.35% 16.76% 8.71%
CHARTS 22-24:
Progressivity of Tax Scenarios for Single Adults with Two Dependents, Black Page 82 of 118
TABLE 23: Total Tax Burden on Blacks by Scenario, Income Level and Household Type Black Husband/Wife, Two Dependents
Income Range Representative Income Household Type Status Quo Low Sales/ Groc/ State Real Prop/Title Low Sales/Groc/Inc
$0-$9,999 $7,700 Husband/Wife, two dependents 18.92% 12.28% 11.17%
$10,001 - $17,999 $14,854 Husband/Wife, two dependents 10.27% 7.33% 6.23%
$18,000 - $24,999 $20,900 Husband/Wife, two dependents 9.52% 7.95% 6.28%
$25,000 - $34,999 $29,467 Husband/Wife, two dependents 8.33% 16.50% 5.68%
$35,000 - $49,999 $44,431 Husband/Wife, two dependents 7.78% 16.36% 6.40%
$100,000 + $110,173 Husband/Wife, two dependents 6.62% 16.91% 8.34%
CHARTS 25-27:
Progressivity of Tax Scenarios for Husband/Wife Households with Two Dependents, Black Page 83 of 118
Page 84 of 118
APPENDIX 1: METHODOLOGY
Representative Households
The objective of our research was to examine the impact of different state tax scenarios on representative households that vary by income level, household composition, and race/ethnicity. In order to choose the income level, household type, and racial/ethnic groups to include in our representative households, we examined data from the 2000-2002 March Supplement of the U.S. Census Bureau’s Current Population Survey (CPS). CPS data from 2000-2002 were pooled in order to attain a sample size with acceptable statistical properties.
Drawing from the CPS data on the distribution of households in Tennessee, as well as at the request of the Tennessee Tax Structure Study Commission, we calculated tax burdens for a total of 42 representative households comprised of seven income levels, three household types, and two racial/ethnic groups. The income levels we used include the following annual income ranges: less than $10,000, $10,001-$17,999, $18,000-$24,999, $25,000-$34,999, $35,000-$49,999, $50,000-$99,999, and $100,000 and over. In order to calculate tax burden estimates for the average household at each of these income levels, we created seven representative income groups from the CPS data: $7,700, $14,854, $20,900, $29,467, $44,431, $78,619, and $140,150.
We also relied on the CPS data to construct household types. Per request of the Tax Structure Study Commission, the representative households we included were the single adult household with no dependents, the single parent household with two dependents, and the husband/wife household with two dependents. These household types contained the largest proportion of the total Tennessee population.
The racial/ethnic groups we used were black and white, also at the request of the Tax Structure Study Commission. Data was not available at the $90,000 and over level broken down by race, but it was available at the $70,000 and over level. Since we were unable to do calculations for the representative households at income level $78,619 or $140,150 by race, we created a new representative household at income $110,173 for the analyses by race.
Calculating Sales Tax
In order to calculate total sales tax burden for our representative households, we first identified items that were taxable under each scenario (see Appendix 2). Using the Bureau of Labor Statistics’ Consumer Expenditure Survey (CES), we then calculated each representative household’s average annual expenditures on each consumer item according to household income.
The average annual expenditure estimates that are available from the CES are broken into income levels that differ from those of our representative households. Namely, the CES average expenditure estimates are broken up into the following income levels: $5,000-$9,999, $10,000-$14,999, $15,000-$19,999, $20,000-$29,999, $30,000-$39,999, $40,000-$49,999, $50,000-$59,999, $60,000-$69,999, $70,000-$89,999, and $90,000 and over. Because the CES income levels did not exactly mirror our representative household income levels, we had to make adjustments for the expenditure data. To calculate average expenditures for our representative $10,001-$17,999 level, we averaged the expenditures for households in the CES income ranges from $10,000-$14,999 and $15,000-$19,999, and so forth.
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In order to adjust for economies of scale and the household composition of our representative households, we made adjustments for clothing and food expenditures depending on household type and size, as described below.
The Consumer Expenditure Survey includes expenditures for food that were purchased with food stamps or WIC vouchers. These purchases would not be taxed in Tennessee, but it was impossible to remove them from our estimates of expenditures for food during this study. The subset of low-income households that use the food stamp and WIC programs would experience some sales tax relief from the fact that these purchases may not be taxed.
Children Clothing Adjustment
For each representative household, we calculated an average of expenditures on clothing for boys aged 2-15, girls aged 2-15, and children aged 2 and under. We also calculated an average of expenditures for children’s footwear. We did this to account for any gender and age differences in expenditures on clothing and footwear. We called the sum of the average spent on clothes and the average spent on footwear the “average child clothing expenditures.” When doing calculations for two dependent households, we multiplied the average child clothing expenditures by 1.75 to account for economies of scale.
Adult Clothing Adjustment
For each representative household, we calculated an average of expenditures on clothing for men 16 and over and for women 16 and over. We also calculated an average of expenditures for adults’ footwear. We did this to account for any gender and age differences in expenditures on clothing and footwear. We called the sum of the average spent on clothes and the average spent on footwear the “average adult clothing expenditures.”
We next applied the tax rates in each scenario to the expenditure amounts in the CES for each representative household.
Data on gifts of goods and services was not available by race. We used the gifts of goods and services figures for the general population that included both races. For the $110,173 household we used the Gifts of Goods and Services figures from Table 7050, which used data from both the 2001 and 2002 CES. We used data from the $90,000 and above expenditure category.
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Calculating Income Tax
The next type of tax we examined was a state income tax. In order to calculate the income tax burden for our representative types, we subtracted the personal exemptions and standard deductions applicable to each household. We assumed that the married couple filed jointly. The taxable income was then taxed using the graduated rate schedules supplied by the TTSSC.
Calculating Motor Vehicle Tax
Using Consumer Expenditure Survey data, we estimated the number of vehicles owned by households at different income levels. These figures are for the population as a whole and are not broken up by household type.
Income Range Number of Cars
$0 – 9,999 1
$10,000 – 17,999 1
$18,000 – 24,999 1
$25,000 – 34,999 2
$35,000 - $49,999 2
$50,000 – 99,999 3
$100,000+ 3
For the purposes of estimating the average values of vehicles we used the average after-tax income listed in the Consumer Expenditure Survey, Table 7050, 2001-2002, and assumed that each household’s average car payment per month is fifteen percent of their average after-tax monthly income. This is the industry standard.
We used the average interest rates for auto loans in Tennessee, found at http://biz.yahoo.com/b/r/astn.html. These rates are based on an average for Memphis and Nashville. The average rate for new cars was 6.74 percent and the average rate for used cars was 7.25 percent. For our purposes we used an average of these two rates, 7.0 percent, rather than assume that the households in our scenarios purchased either type of car. We also assumed that the households would make payments on their auto loans for 60 months. (Please note: our study does not take into account variations in interest rates or the duration of the loan repayment period).
We used an industry standard formula to estimate the original loan amount for each household’s vehicle. We are using the loan amount as a proxy for the value of each household’s vehicle. This formula can be found at:
http://oakroadsystems.com/math/loan.htm.
The formula is:
A=P/i[1-(1+i)-N]
A The principal sum of the loan
P The amount of each equal payment
I The interest rate per month
N The total number of payments for the entire loan
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For the purposes of the sales tax we are removing the amount spent on vehicles in Table 7050 and replacing it with the figures we calculated. We assumed that a household would buy no more than one car per year.
For the title tax on motorized, registered items (e.g. autos, boats, motorcycles, etc.), we multiplied the value of the average car for each income level by the number of cars that households at each income level purchase (see table above). We used this as a base to apply the motor vehicle ad valorem tax to, since a household would have to pay this title tax each year during registration renewal.
We assumed in our status quo calculations that the hypothetical county these households live in had adopted the higher limits on the local option sales tax and on the single article caps.
There was one proposal that the title tax would not be imposed in the year the car is purchased, but we have included both a sales tax on the vehicle and the title tax to show the differential impact of this tax on people at different income levels.
While planes and boats would be subject to such a title tax, there was not sufficient information available to include these in our analysis.
Calculating Property Tax
We used an industry standard to calculate the value of a mortgage people at different income levels could obtain, which we used as a proxy for the value of their houses.
According to an expert with whom we consulted at First Tennessee Bank, bank mortgage offices use the following information to guide their clients. Assuming the clients have perfect credit and no debt, they can qualify for a mortgage that is five times their income. To take into account the likelihood of consumers having debt and/or less than perfect credit, we then multiplied this figure by two-thirds. (Please note: race differences in lending and location of property were not factored into this study. We used the same formula for blacks and whites to calculate property values.)
Other Taxes
�� Local option sales tax. We assumed the highest local option sales tax (2.75 percent).
�� Hall Income tax. We left the Hall tax out of our analysis because it affects only a small percentage of Tennesseans.
�� Professional privilege tax. We left this tax out of our analysis because there was no way to determine whether the representative households in our study would be subject to this tax or not.
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APPENDIX 2: SUMMARY OF ANALYZED TAX SCENARIOS
Status Quo Sales Tax
�� Sales tax on most items set at 9.75 percent (includes state tax of 7.00 percent & local option tax of 2.75 percent)
�� Sales tax on food items set at 8.75 percent (includes state tax of 6.00 percent & local option tax of 2.75 percent)
�� Sales tax on phone services set at 9.50 percent
�� Eliminate 2.75 percent tax on $1,601 to $3,200 of single article
�� Expenditures for food adjusted to account for number in household
�� Expenditures for clothing adjusted to account for number of adults & number of children in household
�� No income tax included in the status quo analysis
Lower Sales-Lower Grocery-State Real Property-Title Tax
�� State sales tax of 6.0 percent
�� State sales tax on groceries at 4.0 percent
�� No local option tax
�� Eliminate 2.75 percent tax on $1,601 to $3,200 of single article
�� Title tax based on 1.75 percent of value on registered items (car, motorcycle, boat), averaging $100 per item.
�� Implement statewide tax on real property at $2.60 rate per $100 assessed value
�� Expenditures for food adjusted to account for number in household
�� Expenditures for clothing adjusted to account for number of adults & number of children in household
�� No income tax included in the Lower Sales-Lower Grocery-State Real Property-Title Tax Scenario analysis
Lower Sales-Lower Grocery-Graduated Income Tax Scenario
�� State sales tax on all items calculated at 6.0 percent general rate
�� State sales tax on groceries calculated at 4.0 percent
�� No local option tax
�� Eliminate 2.75% tax on $1,601 to $3,200 of single article
�� Eliminate Hall income tax
�� Provide credit for professional privilege tax
�� Expenditures for food adjusted to account for number in household
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�� Expenditures for clothing adjusted to account for number of adults & number of children in household
�� Income tax calculated using the following:
o $15,000 exemption per adult for single and married filing separately
o $30,000 exemption for married filing jointly
o $22,050 exemption for head of household
o $2,000 deduction per dependent in the household
▪ Rates for single adult households:
Income Tax Rate
$15,000 - $24,999 3.50%
$25,000 - $34,999 4.25%
$35,000 - $49,999 5.00%
$50,000 + 6.00%
▪ Rates for married filing separately:
Income Tax Rate
$15,000 - $24,999 3.50%
$25,000 - $34,999 4.25%
$35,000 - $49,999 5.00%
$50,000 + 6.00%
▪ Rates for married filing jointly:
Income Tax Rate
$30,000 - $49,999 3.50%
$50,000 - $69,999 4.25%
$70,000 - $99,999 5.00%
$100,000 + 6.00%
▪ Rates for heads of households:
Income Tax Rate
$22,050 - $36,749 3.50%
$36,750 - $51,449 4.25%
$51,450 - $72,499 5.00%
$73,500 + 6.00%
Page 90 of 118 Page 91 of 118
Minority Report and Letters from the Members
Members of the Commission submitted the following minority report and letters.
Page 92 of 118
December 17, 2004
Mr. Nelson Andrews
Chairman
Tennessee Tax Structure Study Commission
W.R.S. Tennessee Tower
Suite 2700
Nashville, TN 37243
Re: Minority Report
Dear Chairman Andrews:
This letter is submitted to be included in the final report of the Tax Structure Study Commission as a Minority Report supported by those individuals whose names are reflected below.
As you know from the discussions on the Commission’s final meeting on the 9th, we have had some serious reservations with the directions of the report and the method used to arrive at those directions. After some considerable reflection and reading the draft report e-mailed to the Members of the Commission on the evening of December 13th, we have concluded that it is necessary to file this letter and insist that it be treated as a Minority Report and included in the printed version of the Report supplied to the Governor and the Speakers.
At the November meeting of the Commission, we believe the general agreement reached was that the Commission would file a report that recommended as follows:
1. the State sales tax be reduced to 6% for all items;
2. the State franchise tax be cut in half and real and tangible personal property be removed from the franchise tax base,
3. local governments be held harmless for the reduction in sales tax; and
4. three separate options would be offered for replacing the money lost due to the reductions in the sales and franchise taxes above.
Those options would be
(a) a graduated income tax (similar to that ultimately included in the Motion approved on the 9th);
(b) a low State real property tax; or
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(c) a tax on all registered vehicles, etc., which might include an exemption for vehicles beneath a certain value.
What actually happened during the Commission’s last meeting on the 13th was that the proposal subcommittee recommended that the reduction in sales tax be enlarged by reducing the sales tax on grocery food to 4%, thereby increasing the amount of revenue that would need to be replaced. Secondly, the recommendation proposed to repeal the Hall income tax which also increased the amount of revenue which would have to be replaced. Thereafter, rather than offering three alternative methods of funding the enlarged shortfall, it was proposed that only the income tax be offered as an alternative, at least partly because it is the only one of the alternatives that could raise enough money to cover the enlarged shortfall. In addition, the alternatives involving a low State property tax and a modest per-vehicle fee, instead of being stand alone options, were combined in a single proposal which is so obviously unacceptable as to be unrealistic.
Some of us arrived on the 9th assuming that we would have an afternoon’s discussion which would continue into a full meeting on the 10th and which might well be continued to another scheduled day on the following week. It became immediately apparent that a proposal would be made, voted on, and the Commission would adjourn, never to return.
We have expressed this objection repeatedly, and we do so now for the record. We are not comfortable with a process that results in our voting on six brief propositions which would then be turned into a forty-page report which few member of the Commission will have a significant opportunity amend. If the Report that was e-mailed to us on the 13th is to be the substance that is finally approved, it should have been supplied to the Commission at least a month in advance of our final vote so that individual Members could suggest improvements and consider their positions on the details of the Report. As the Report stands today, it is largely the well-written prose of a qualified consultant which includes materials and conclusions which may or may not have been presented to the Commission.
An example of the editorial license taken by the author of the draft, the third full Paragraph on Page 8 of the e-mailed draft discusses “Proposal Two:” which uses both the property tax and a vehicle tax to fund the reductions in taxes. That Paragraph includes the following sentence:
“Based upon projections, the Commission determined that package two could not support the repeal of the Hall income tax.”
This Paragraph is not factually accurate. Until the final meeting of the Commission, package two did not exist and was never considered as a single proposal. As stated above, the property tax and the vehicle tax were perceived as separate, free standing tax replacement vehicles. This is only a single example of the kind of editorial license taken with the efforts of this Commission.
We would note that, while we have the objections stated above, we are very much in support of the changes to the franchise tax and would suggest that it would make a major difference in Tennessee’s ability to recruit and retain industry.
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Mr. Chairman, we had hoped it would not be necessary to submit a Minority Report. Each of us who signed below either abstained from voting or voted no on the proposal approved by the Commission. This Commission, while widely abused by commentators, has put in two years of difficult work. We have greatly enjoyed the time spent with the various Members of the Commission and with its staff.
Very truly yours
Dan Haskell
Julius T. Johnson
Will Pugh
DH/cjm
Page 95 of 118
December 16, 2004
Mr. Nelson Andrews
Chairman
Tennessee Tax Structure Study Commission
Dear Chairman Andrews:
Re: Final Report
I am very concerned about how the final document reflects my negative vote on the proposal. It is critical that my participation and final conclusion on the proposal not be misrepresented to indicate that the Tennessee Farm Bureau Federation and I were in favor of the final proposal. I am requesting that the entire vote be reflected in the final document and that those voting “no” and those “abstaining” be listed.
If this does not happen, the document incorrectly reflects our position to many Tennesseans reading the document.
I have many concerns about the process used to rush to a decision on the final proposal yet feel it needless to enumerate them. The outcome would not change. I regret the final meeting and the process used to decide on a final proposal was not more professionally handled.
Respectfully submitted,
Julius T. Johnson
Chief Administrative Officer
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PUGH & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
WILL J. PUGH, CPA
RONNIE G. CATE, CPA HOME FEDERAL PLAZA - SUITE 200 MEMBERS
C. LARRY ELMORE, CPA 315 NORTH CEDAR BLUFF ROAD
W. JAMES PUGH, JR., CPA KNOXVILLE, TENNESSEE 37923 AMERICAN INSTITUTE OF
DANIEL C. FRANKLIN, CPA ___________ CERTIFIED PUBLIC ACCOUNTANTS
JAMES H. JONES, CPA
LISA W. HILL, CPA P.O. BOX 31409 TENNESSEE SOCIETY OF
SUSAN R. FOARD, CPA KNOXVILLE, TENNESSEE 37930-1409 CERTIFIED PUBLIC ACCOUNTANTS
ANDREW R. HARPER, CPA
865-769-0660 800-332-7021
TELECOPIER 865-769-1660
December 17, 2004
Mr. Nelson Andrews, Chairman
Tennessee Tax Structure Study Commission
Nashville, TN
Re: Minority Report
Dear Chairman Andrews:
This letter is submitted to be included in the final report of the Tax Structure Study Commission as a Minority Report. I agree with the Minority Report of Dan Haskell, Julius Johnson and Will Pugh except as reflected below.
As I remember, the November 19th meeting, the Committee voted to provide additional revenue to offset the items included in the personal income tax option, with a second option for additional revenue from a low state Real Property Tax along with an Ad valorem Tax on registered motorized vehicles, boats, planes, motor homes, and motorcycles. The latter would produce about $100 per vehicle. The second option did not eliminate the Hall Income Tax.
Thanks for considering this Report.
Very truly yours,
Will J. Pugh
Will J. Pugh
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MEMORANDA OF COMMENT, RESERVATIONS, OR DISSENT
by Grover L. Porter, CPA, PhD
The Tax Reform Act of 2002 created the independent Tax Structure Study Commission and charged the Commission with performing a comprehensive study of the tax structure in Tennessee. The Commission was charged, if deemed necessary, with recommending changes in the tax code in order to encourage and enhance soundness, fairness, equity and adequacy of the Tennessee tax structure.
I wholeheartedly agree that the tax structure recommended by the Commission meets all charges contained in the Tax Reform Act of 2002, except adequacy. Although the definition of adequacy [“revenue neutral”] recommended by the majority of the voting members of the Commission has been met by the recommended tax structure, I do not believe the Commission’s definition is valid. The Commission’s definition: “Adequacy is the budget proposed by the Governor, passed by both bodies of the General Assembly, and approved by the Governor.”
If the Commission’s definition of adequacy is valid, why is Tennessee near the bottom in most reports regarding the rankings of states [1 best-50 worst]? Although there are low rankings for most areas of state government, I will report only the following examples to illustrate my point [“Tennessee by the Numbers,” TSEA Co--Worker, November 2004]:
49th in total education spending,
44th in percent of college graduates,
43rd in percent of high school graduates,
44th in per pupil spending,
43rd in median household income,
46th in total tax revenue as percentage of personal income,
45th in average salary of state employees.
The budgets proposed in Tennessee by Governors, passed by both bodies of the General Assembly, and approved by Governors have not been adequate in my lifetime [I’m 72 years young]. The usual responses by politicians to budget problems in Tennessee are: “We’ve balanced the budget just fine with the resources we have.” They have balanced the budgets but their methods of balancing the budgets are the reasons Tennessee has so many undereducated Tennesseans and so few employers providing quality jobs to Tennesseans.
The solution to the many problems relating to budgets in Tennessee consists of two parts:
1. Expenditures. A thorough analysis of recent budgets in Tennessee reveals that
there are too many bosses and too few workers in state government. A reduction in bosses and an increase in workers would help solve the budget problems in Tennessee. Although this reallocation of funds would help solve the budget
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problems, the reallocation would not completely solve the many problems in Tennessee.
2. Revenues. A thorough analysis of recent budgets in Tennessee reveals that
too large a percentage of revenues [61.4%] come from the sales tax. The Institute on Taxation and Economic Policy ranked Tennessee’s state tax structure the third most regressive in the nation in 2003 for the state’s lack of a broad based income tax, its over-reliance on sales taxes, and the application of the high sales tax to necessities such as food. Although the tax structure recommended by the Commission would be less regressive, the “revenue neutral” definition of adequacy would not completely solve the many problems in Tennessee.
If there are statesmen among the elected officials in Tennessee state government, they will champion the passage of the recommended tax structure and use the new tax structure to provide the additional funds necessary to solve the many problems in Tennessee.
Hope springs eternal!
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Appendix A - Meeting Dates
January 30, 2003 January 15, 2004
February 27-28, 2003 February 12, 2004
March 13-14, 2003 February 26, 2004
April 10-11, 2003 March 11, 2004
April 24-25, 2003 March 25, 2004
May 15-16, 2003 April 29-30, 2004
June 12, 2003 May 13-14, 2004
June 26, 2003 June 24-25, 2004
July 15, 2003 July 29-30, 2004
July 31, 2003 August 19-20, 2004
August 14, 2003 September 16-17, 2004
September 25, 2003 October 28-29, 2004
October 23, 2003 November 11, 2004
November 6, 2003 November 18, 2004
November 20, 2003 December 9, 2004
Meeting minutes and presentations can be found on the compact disks accompanying this report or at the Commission’s website www.state.tn.us/taxstructurestudycommission.
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Ross Loder Deputy Director, Tennessee Municipal League Local Government Funding & Tax Sharing in TN Allocation State-Shared Taxes March 13, 2003
March 13, 2003 Ross Loder Deputy Director, Tennessee Municipal League Bredesen State-Shared Tax Reduction Plan Allocation State-Shared Taxes
Date Speaker Organization Title of Presentation Statute Language
February 27, 2003 Bill Fox Director, UT Center for Business & Economic Research Tennessee Revenue Structure State Taxes - Elasticity - E-Commerce
February 27, 2003 Richard Greene Special Project Editor & Management Columnist-Governing Magazine National Study, "The Way We Tax" State Taxes, Elasticity
February 27, 2003 Kelsie Jones Executive Secretary, State Board of Equalization Property Tax Overview Property Taxes - Allocation
March 13, 2003 Warren Neel Director, UT Center for Corporate Governance Macro-Observance of Tax Structure and Governmental Costs Allocation, Economy, State Taxes
March 14, 2003 Harry Green Executive Director, TACIR Financing TN Government in the 21st Century Allocation
April 10, 2003 Harley Duncan Executive Director, Federation of Tax Administrators Tennessee Taxes: A View From The Outside State & Local Taxes, Comparison to other states, Economy
April 10, 2003 Loren Chumley Tennessee Commissioner of Revenue Streamlining Sales & Use Tax Laws Sales Tax, E-commerce
April 11, 2003 Stan Chervin Whatever Happened to Franchise & Excise Tax? Business Taxes
April 24, 2003 William "Bill" Sheldrake Indiana Fiscal Policy Institute Indiana's Tax Restructuring Experience 2001-2002 Other States
April 24, 2003 Charles Garrison VP of Taxation, Tennessee Chamber of Commerce & Industry Business Perspective of Current Tax Structure Business
April 25, 2003 Dan Bucks Executive Director, Multi-State Tax Commission New Economy Trends Facing State Tax Structures Economy
April 25, 2003 Dan Bucks Executive Director, Multi-State Tax Commission New Economy & State Tax Structure Economy
May 15, 2003 Will Rice Washington State Commissioner of Revenue Process and Recommendations: Washington State's Tax Struture Study Other States
Appendix B - Presentations
Public Finance Consultant, TACIR
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May 15, 2003 Charles Trost Attorney, Waller Lansdon-Nashville Potential Impact of Increasing Business Taxes on Tennessee Economic Growth Business
May 16, 2003 Robin Capehart Former West Virginia Tax & Revenue Commissioner Tax Reform in West Virginia Other States
June 12, 2003 Julius Johnson & Rhendona Rose Tennessee Farm Bureau Quick Overview of Tennessee Agriculture Agriculture
June 12, 2003 Margaret Mahery Executive Director, Tennessee Municipal League Legilsative Session in Review for Municipalities Allocation, Local Taxes
June 12, 2003 Barbara McIntyre (Columbia Mayor) Charles Sanders (Columbia Vice Mayor) Webb Banks ( Brownsville Mayor) Lynn Wampler (Fayetteville City Administrator) Connie Edde (Lewisburg City Recorder/Treasurer) Ed Craig (Shelbyville City Manager) Panel Discussion: Local Implications of Tennessee's Tax Structure: Strengths, Weaknesses & Suggestions State-shared Taxes, Local Taxes, Allocation
June 26, 2003 George Isaacson Attorney, Brann & Isaacson, Tax Counsel to Direct Marketing Association Taxation of Electronic Commerce: Problems, Perils and Pitfalls of the Streamline Sales Tax Agreement E-Commerce, Sales Tax
June 26, 2003 Rob Ikard Tennessee State Director, National Federation of Independent Businesses Small Business Perspective on the Current Tax System Business
June 26, 2003 Senator Joe Haynes Democratic Cacus Chairman Streamlining Sales & Use Tax State Taxes - Local Taxes, Sales Tax
June 26, 2003 Bill Merry, Jr. President, Herndon and Merry & former chairman, NFIB TN Leadership Council Impact of Taxes on Business Business
June 26, 2003 Brian McGuire AARP State Legislature Director State Revenue: Considering Older Tennesseans Allocation
July 15, 2003 Bob Corker Mayor of Chattanooga Welcome Remarks
July 15, 2003 David Copeland Former State Representative As Taxes Should Be State Taxes - Local Taxes, Fairness, Adequacy
July 15, 2003 David Eichenthal Chattanooga City Finance Officer Comments on Sales Tax Structure & Impact on Local Economy Local Tax, Sales Tax, Economy
July 15, 2003 Bill Cecil Health Policy Research Indirect Costs of TennCare & Medicaid Business, Economy
July 15, 2003 Vicky Gregg Pres/CEO, Health Policy Research Impact of Taxes on Health Insurance Industry Business, Economy
July 15, 2003 David Deal Sr VP/CFO, Health Policy Research Impact of Taxes on Health Insurance Industry Business, Economy
July 15, 2003 John Houston CPA An Overview of TN and GA Income Taxation of Industry & Non-Corporate Business Other States, Business
July 15, 2003 Rick Platz Director, Tennessee Small Business Development Center Tax Issues for Small Business Business, Sales Tax
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July 15, 2003 Wes Ball Executive Director, Tennessee Grocers Association Dynamics of Sales Tax Structure on Single Store Operations Business, Sales Tax, Other States
July 31, 2003 John Stewart (TFT Board Chair) Brian Miller (TFT Executive Director) Dale Gray, Polly Marsh, Brian Paddock (attorney) Tennesseans for Fair Taxation State Taxes, Adequacy, Fairness
July 31, 2003 Susan Pace Hamill Professor of Law, University of Alabama Tax Reform from a Moral Perspective Adequacy, Fairness, Other states
July 31, 2003 Al Babbitt (Deloitte & Touche) Brad Withrow (Ernst & Young) Tennessee Taxation of Healthcare Industry Economy, Hospitals
July 31, 2003 Jim Lundy Tax Partner, Davidson & Golden PC Tennessee Business Taxation: A Comparision of Surrounding States Business, Other States
July 31, 2003 Joe Crosby Legislative Director, Council of State Taxation A Business Perspective on Tax Reform Business, Economy
July 31, 2003 Kirk Low CPA Suggested Changes to the Hearing System at the Dept of Revenue & Board or Equalization
August 14, 2003 Will Callaway Executive Director, Tennessee Environmental Council Need for Sufficient Funding to Ensure Environmental Protection in Tennessee Adequacy, Allocation
August 14, 2003 Charles Bargiachi CPA & Partner, Lenahan Smith & Bargiachi PC TN Taxation of Pass-Thru Entities Business, Economy
August 14, 2003 Jim Huntzicker ( Director of Administration & Finance, Shelby County) Joseph Lee (Finance Director, Memphis) Jay Rainey (Chief Administrative Officer, Bartlett) Comments on the Current Tax Structure and the Impact on Local Economy State-Local Taxes, Allocation, Elasticity
August 14, 2003 Lewis Donelson Attorney & Shareholder, Baker Donelson Impact of Current TN Tax Structure Economy, Fairness, Adequate, Business
August 14, 2003 Jim Jones (Executive Director, Local Finance, State Dept of Education) George Chapman (Director of Schools, Haywood County) Doris Battle (Assistant Director of Schools, Haywood County) Trends in TN K-12 Funding Adequacy
August 14, 2003 James Baird Tennessee Director, Americans for Fair Taxation The Fair Tax: The Best Model for Tennessee's Tax System Fairness, Sales Tax
September 25, 2003 Bill Fox Director, UT Center for Business & Economic Research Retaliatory Taxation Retaliatory Taxes
September 25, 2003 Matt Gardner Sr Policy Analyst, Institute on Taxation & Economic Policy Tax Fairness in TN & Options for Reform Fairness, Equity
September 25, 2003 Stan Arnold & Bill Ardingner Rath Young & Pignatelli New Hampshire Business Enterprise Tax Business, Other States
September 25, 2003 Lew Weems (Knoxville Market President, First TN Bank) Gregory S. Metz (Sr VP, Tax Director, Union Planters Bank) G. Michael Yopp (Tax Attorney, Waller Lansden Dortch & Davis PLLC) Current Tax Structure & Impact of Financial Institutions Business
September 25, 2003 Doris Martin Revenue Administrator - City of Knoxville Tax Structure and the Local Economy Local Tax, Economy
September 25, 2003 David Purkey (Mayor Hamblen County) Dwight Murphy (Mayor Scott County) Larry Waters (Mayor Sevier County) Mike Ragsdale (Mayor Knox County) Impact of Current TN Tax Structure Local Taxes, Economy, Adequacy
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September 25, 2003 Archie Harris President, Mainframe Services Inc - Chattanooga Taxation of Technology Companies in Tennessee Business, Economic Competitiveness, Fairness
September 25, 2003 Dr. Mac Simpson Associate Professor Emeritus of Political Science, UT Knoxville A Perspective of the Recent History of Tennessee's Effort to Improve its Tax Structure State Taxes
September 25, 2003 David Beaty Save Our Cumberland Mountains Rural Tennessee Tax Burden Sales Tax, Business
October 23, 2003 Dr William Ford Professor, Middle Tennessee State University A Proposal for Reforming Tennessee State Tax System Economy, State Tax
October 23, 2003 Charles Howell Former State Representative & Former Assistant Comptroller, Finance & Administration The Answer to Tennessee's Fiscal Crisis: Tax All Wealth Equitably State Tax, Equity
October 23, 2003 Claire Carrico Vice President of Legislative Affairs, TN Association of Audiologists & Speech Pathologists Inequities in the Professional Privilege Tax Business
October 23, 2003 Janneen Kaufman Controller - Tennessee Titans Taxation of Sports & Entertainment Business
October 23, 2003 Royce Roy Chairman, Tennessee Society of CPA's Taxation of Sports & Entertainment Business
October 23, 2003 Beth Snider Senior Director of Finance, Nashville Predators Taxation of Sports & Entertainment Business
October 23, 2003 Lt. Gov. John Wilder Speaker of the Senate, Tennessee Legislature Review of Tennessee Tax History State Taxes, Deductibility
October 23, 2003 D. Scott White Deputy Commissioner, Department of Commerce & Insurance Insurance Premium Tax Collection in Tennessee Business
October 23, 2003 Gordon Bonnyman Managing Attorney, Tennessee Justice Center The State's Role as a Purchaser of Health Services as a Factor in Designing Tax Policy Economy, State Tax Adequacy
October 23, 2003 Paul Summers and Larry Lewis Tennessee Attorney General & Deputy Attorney General - Tax Division Constitutional Limits on Taxation Soundness, State Taxes
October 23, 2003 Richard Pomp University of Connecticut School of Law and former Director of the New York Tax Study Commission Combined Unitary Reporting for Corporate Taxpayers Business
October 23, 2003 Linda O'Neal Executive Director, Tennessee Commission on Children & Youth Kids Count: The State of the Child in Tennessee Adequacy
November 6, 2003 Aubrey Becker Eastman Chemical - Retiree What is the Logic of Taxing Investment Income in Tennessee? Fairness, Equity
November 6, 2003 Dave Clark Former Kingsport Alderman & Principal, Clark & Company Effects of Current Taxation on Small Business Owners Business
November 6, 2003 Dr. Steb Hipple East Tennessee State University Sales Tax Losses From Tennessee to Virginia Economy, Sales Tax, Other states
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November 6, 2003 Wade Farmer CPA, Blackburn, Childress & Steagall PLC Administration of Tennessee's Taxes: As It Is Now and As It May Be in the Future State Tax, Business
November 6, 2003 Wayne Estes VP Communications & Events, Bristol Motor Speedway Regional Economic Impact of Bristol Motor Speedway Economy, Sales Tax, Business, Tourism
November 6, 2003 Jeanette Blazier and Richard Venable Mayor of Kingsport and Mayor of Sullivan County Overview of Kingsport Revenue & Taxation Local Taxes, Sales Tax, Economy
November 6, 2003 Jim Rogers Sr VP & CFO Eastman Chemical Impact of Current TN Tax Structure on Eastman Chemical Business
November 6, 2003 Dan Mahoney President - Mahoney's Outdoor Sports & Former Mayor of Johnson City Effects of Sales Tax Rates and Catalog & Internet Sales on Retail Businesses in Tennessee Sales Tax, E-Commerce
November 6, 2003 Roy Harmon CEO - Bank of Tennessee Fairness of Application of Taxes Fairness, Business
November 6, 2003 Paul Sarnoff Retired VP and Associate Actuary, Prudential Insurance The Present Tennessee Death Taxes Are Out Of Place in a Rationally Revised Sales Tax Structure Adequacy, Fairness, State Tax
November 6, 2003 John Gaines Former Bristol City Mayor & Bristol Councilman Impact of Current TN Tax Structure on Bristol Education Adequacy
November 20, 2003 Mandy Rafool Program Principal w/Fiscal Affairs Program, Natl Conference of State Legislatures State Tax and Expenditure Limits State Taxes, Other States
November 20, 2003 Reid Linn Director, Economic Research, TN Dept Revenue State Income Tax Deductibility & Federal Tax Savings Federal Deductibility
November 20, 2003 David Copeland Former State Representative Highlights of House Bill 476 Economy, Business
November 20, 2003 James Bryson State Senator (R) Franklin Constitutional Amendment Bill - Caps State Spending
November 20, 2003 Ronnie Steinberg Director, Women's Studies Program, Vanderbilt Impact of Tax Reform on Tennessee Women Fairness, Equity
November 20, 2003 Linda McCarty Executive Director, TN State Employees Assn Fair Compensation and Treatment of State Employees Adequacy, Fairness
November 20, 2003 Will Pugh Commission Member & Chairman of the Board, Pugh & Company PC Personal Privilege Tax Business
January 15, 2004 Grover Porter Commission Member & CPA & Professor of Accounting, Tennessee State University Tennessee's Business Environment: Attracting Business Business, State Tax
January 15, 2004 Al DePrince Commission Member & Professor of Economics & Finance, MTSU Views on Tax Reform State Tax
February 12, 2004 Dr. Bill Fox Center for Business & Economic Research, UT State versus National VAT Business
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February 12, 2004 Loren Chumley Commissioner, Dept of Revenue Streamlined Sales Tax Project Update E-Commerce, Sales Tax
February 12, 2004 Gary Poe Commission Member & Tax Practitioner Tennessee Business Taxation Business
February 26, 2004 Charles Trost Attorney, Waller Lansdon Dortch & Davis-Nashville Suggestions for Tennessee Business Tax Structure Business
March 25, 2004 Terry Colin Commission Member & Alderman, Munford TN State Shared Revenue - A City's Point of View State-Shared Taxes
March 25, 2004 Stan Chervin Public Finance Consultant, TACIR State-Shared Taxes State-Shared Taxes, Allocation
April 29, 2004 Stan Chervin Public Finance Consultant, TACIR Hall Income Tax Distributions & Local Government Finances State-Shared Taxes, Allocation
April 29, 2004 Reid Linn Director, Economic Research, TN Dept Revenue 2005 Fiscal Year Impact with 2002 Tax Year Data State Taxes, Federal Deductibility
June 24, 2004 Kelsie Jones Executive Secretary, State Board of Equalization Property Tax Classifications, Assessments & Exemptions State Tax, Local Tax
July 29, 2004 Reid Linn Director, Economic Research, TN Dept Revenue Revenue Neutral Scenarios - Statistics & Model Presentation State Taxes
August 18, 2004 Tom Fleming Assistant to the Comptroller for Assessments Statewide Property Tax and Property Classification versus Homestead Exemption State Tax, Local Tax
August 18, 2004 Al DePrince Commission Member & Finance Director, City of Memphis Proposed Healthcare Provider Taxes to Partly Fund the State Share of TennCare State Tax
August 18, 2004 Bill Henderson Commission Member Tennessee's Wealth Transfer Taxes State Tax, Other states
August 18, 2004 Steve Gill Radio 99.7 WTN Myths of Tax Reform State Tax
August 18, 2004 Lloyd C. Daugherty Chairman, Tennessee Conservation Union Pitfalls of State Income Tax State Tax, Fairness
September 14, 2004 Bert Waisanen Senior Policy Analyst, Natl Council of State Legislators Policy Aspects of State Income Tax System State Tax, Elasticity
September 14, 2004 Martin Simmons Counsel to Frost Brown Todd Law Firm Suggestions to Improve Business Tax Structure Business
November 18, 2004 Tom Fleming Assistant to the Comptroller for Assessments Homestead Exemptions State Tax
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Appendix C - Public Acts
PUBLIC ACTS, 2002
CHAPTER NO. 856
SENATE BILL NO. 3110
By Cooper, Clabough
Substituted for: House Bill No. 3046
By Curtiss, Newton, Fraley, Overbey, Johnson, Walker, Ferguson
AN ACT To enact the "Tax Reform Act of 2002" and to amend Tennessee Code Annotated, Title 3; Title 4; Title 5; Title 6; Title 7; Title 8; Title 9; Title 12; Title 16; Title 30; Title 36; Title 39; Title 40; Title 45; Title 47; Title 48; Title 55; Title 56; Title 57; Title 61; Title 62; Title 67; Title 68; Title 69; Title 70 and Title 71, relative to taxation.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF TENNESSEE:
SECTION 12. (a) There is hereby created an independent Tax Structure StudyCommission.
(b) The commission shall be composed of fifteen (15) members as follows:
(1) A chair who shall be appointed by the Governor and who shall not be affiliated with any group specified within this section;
(2) One (1) member, representing the interests of counties, who shall be appointed by the Speaker of the Senate following consultation with the County Services Association;
(3) One (1) member, representing the interests of municipalities, who shall be appointed by the Speaker of the House of Representatives following consultation with the Tennessee Municipal League;
(4) One (1) member, representing the interests of business, who shall be appointed by the Speaker of the Senate following consultation with the Tennessee Association of Business;
(5) One (1) member, representing the interests of agriculture, who shall be appointed by the Speaker of the House of Representatives following consultation with the Tennessee Farm Bureau;
(6) One (1) member, representing the interests of the banking industry, who shall be appointed by the Speaker of the Senate following consultation with the Tennessee Bankers Association;
(7) One (1) member, representing the interests of the various chambers of commerce, who shall be appointed by the Governor following review of a list of four (4) nominees: one (1) of whom shall be submitted by the Knoxville Chamber of Commerce, one (1) of whom shall be submitted
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by the Chattanooga Chamber of Commerce, one (1) of whom shall be submitted by the Nashville Chamber of Commerce and one (1) of whom shall be submitted by the Memphis Chamber of
Commerce;
(8) One (1) member, representing the interests of labor, who shall be appointed by the Speaker of the Senate following consultation with the Tennessee AFL-CIO Labor Council;
(9) One (1) member, representing the interests of families, who shall be appointed by the Speaker of the House of Representatives;
(10) One (1) member, representing the interests of the elderly, who shall be appointed by the Governor following consultation with the American Association of Retired Persons;
(11) One (1) member, representing the interests of tax attorneys, who shall be appointed by the Speaker of the Senate following consultation with the Tennessee Bar Association;
(12) One (1) member, representing the interests of accountants, who shall be appointed by the Governor following consultation with the association of Certified Public Accountants;
(13) One (1) member, representing the interests of the health care industry, who shall be appointed by the Speaker of the House following consultation with the Tennessee Hospital Association;
(14) One (1) member, representing the interests of the insurance industry, who shall be appointed by the Speaker of the House following consultation with the Association of Tennessee Life Insurance Companies; and
(15) One (1) member, representing the interests of state employees, to be appointed by the Governor following consultation with the Tennessee State Employees Association.
In making appointments to the Commission, the Governor, the Speaker of the Senate, and the Speaker of the House shall make every effort to ensure that at least one (1) of the members of the commission is an African-American.
(c) The Commission shall also consist of five (5) non-voting members as follows:
(1) One professor from the University of Tennessee at Knoxville, who shall be designated by the Dean of the School of Business;
(2) One professor from Vanderbilt University, who shall be selected by the Dean of the School of Business;
(3) One professor from Tennessee State University, who shall be selected by the Dean of the School of Business;
(4) One professor from the University of Memphis, who shall be selected by the Dean of the School of Business; and
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(5) One professor from Middle Tennessee State University, who shall be selected by the Dean of the School of Business.
(d) If a vacancy occurs in commission membership for any reason, then the vacancy shall be filled in the same manner as the initial appointment.
(e) The commission is authorized to employ such staff, as it deems necessary, subject to the availability of funding specifically appropriated for such purpose. The commission may also call upon other state and local governmental agencies and entities for other assistance.
(f) (1) The commission shall perform a comprehensive study of the tax structure in Tennessee. The study shall include state taxes, local taxes, special district taxes and state-shared taxes. The commission shall study the elasticity of the current tax structure, the effect of E-commerce upon the current tax structure, the method of allocation of state tax revenue, the effect of allocation of tax revenue based on situs of collection, current distribution formulas for tax revenue, special allocations of tax revenue based on population or tourism-related special treatment and the deductibility of state and local taxes from federal taxes. The commission shall also study issues pertaining to exportability and federal deductibility of Tennessee's state and local taxes. The commission shall also study taxes on beer, liquor, wine and cigarettes. The commission shall examine, compare and evaluate the impact and potential impact of various taxes upon the state's business climate and economic competitiveness.
(2) The commission shall study issues pertaining to retaliatory taxes and shall determine if Tennessee tax rates should be tied to average tax rates subject to retaliation. Business taxes shall be studied to determine if taxes in Tennessee are comparable to surrounding states, whether or not business activity is fairly taxed and whether the business tax structure in Tennessee should be revised due to the shift in the economy from manufacturing industry to service industries. The franchise and excise tax shall be studied to determine if consolidated filing should be required and if current allocation formulas fairly apportion income and losses. The business tax structure shall also be studied to determine the extent, if any, to which the form of a business entity should be a factor in determining whether such business entity pays state taxes. The commission shall also examine the effect of tax structure and rates on tax leakage to the states surrounding Tennessee.
(3) In general, the commission is charged with performing a comprehensive study of the entire system of taxation in Tennessee, as well as evaluating such system as to its soundness, fairness, equity, and deductibility for all Tennesseans, and, if deemed necessary, with recommending changes to the tax code in order to encourage and enhance such soundness, fairness, equity
and adequacy.
(g) The commission shall report its findings, recommendations and any proposed legislation to the Chief Clerk of the Senate and the Chief Clerk of the House of Representatives on or before July 1, 2004, at which time the commission shall terminate and cease to exist.
PASSED: July 3, 2002
APPROVED this 4th day of July 2002
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PUBLIC ACTS, 2003
CHAPTER NO. 13
HOUSE BILL NO. 1258
By Representatives McMillan, Lois DeBerry
Substituted for: Senate Bill No. 149
By Senators Harper, Haynes, Mr. Speaker Wilder
AN ACT to amend Tennessee Code Annotated, Title 67, Chapter 10, Part 1, relative to the independent tax structure study commission.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF TENNESSEE:
SECTION 1. Tennessee Code Annotated, Section 67-10-102(a), is amended in the first sentence by deleting the word and figure "fifteen (15)" and by substituting instead the word and figure "nineteen (19)".
SECTION 2. Tennessee Code Annotated, Section 67-10-102(a), is further amended by adding the following new subdivisions thereto:
(16) Three (3) citizen members who shall be female, to be appointed jointly by the speaker of the house of representatives and the speaker of the senate;
(17) One (1) citizen member who shall be an African-American, to be appointed jointly by the speaker of the house of representatives and the speaker of the senate;
SECTION 3. Tennessee Code Annotated, Section 67-10-102, is further amended by deleting subsection (b).
SECTION 4. This act shall be funded from the independent tax structure study commission's existing resources in fiscal year 2002-2003 and sums otherwise appropriated to the commission in subsequent fiscal years.
SECTION 5. This act shall take effect upon becoming a law, the public welfare requiring it.
PASSED: March 24, 2003
APPROVED this day of 2003
Pursuant to Article III, Section 18, of the Constitution of the State of Tennessee, the Governor had House Bill No. 1258 in his possession longer than ten (10) days; therefore, the bill becomes law without the Governor’s signature.
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PUBLIC ACTS, 2004
CHAPTER NO. 910
HOUSE BILL NO. 3400
By Representative Fitzhugh
Substituted for: Senate Bill No. 3326
By Senator Haynes
AN ACT to amend Tennessee Code Annotated, Title 67, Chapter 10, Part 1, relative to the independent tax structure study commission.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF TENNESSEE:
SECTION 1. Tennessee Code Annotated, Section 67-10-107, is amended by deleting the date “July 1, 2004” and substituting instead the date “December 31, 2004”.
SECTION 2. This act shall take effect upon becoming a law, the public welfare requiring it.
PASSED: May 20, 2004
APPROVED this 7th day of June 2004
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Appendix D - Wealth Transfer Tax Memorandum
Tennessee’s Wealth Transfer Taxes
By
Bill Henderson and Will Pugh as a Sub-Group of the Study Commission
August 18, 2004
Tennessee imposes four wealth transfer taxes: an inheritance tax; a “pick-up” estate tax; a “pick-up” generation-skipping transfer (GST) tax; and a gift tax.
Fewer than 10 states currently impose an inheritance tax and fewer than 5 states, a gift tax. While all 50 states imposed “pick-up” estate and GST taxes prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Act”), a number of states have acted in the past three years (and others similarly situated are considering acting) to replace their “pick-up” taxes, usually by “decoupling” from the Federal estate and GST taxes.
Currently in the Southeast, only Tennessee and Kentucky impose an inheritance tax, and only Tennessee and North Carolina impose a gift tax. Mississippi imposes a “stand-alone” estate tax with the same exemption amounts as the 2001 Act. None of the states in the Southeast appears to have acted yet to replace its “pick-up” estate and GST taxes.
State Wealth Transfer Taxes in General
An “inheritance tax” is a tax on the privilege of receiving property at the death of the owner; an “estate tax”, on the privilege of transferring property at the death of the owner; a “gift tax”, on the privilege of transferring property during the life of the owner; and a “GST tax”, on transfers of property that escape gift or estate taxes for one or more generations. While theoretically, the inheritance tax is imposed on the decedent’s beneficiaries and the estate tax on the decedent’s estate, typically the decedent’s estate computes and pays both taxes. The donor computes and pays the gift tax. The donor, trustee, or transferee computes and pays the GST tax.
State estate taxes currently take one of three forms. The first is a “stand-alone” estate tax. It is similar to the Federal estate tax in that it is generally calculated by applying a set of graduated tax rates to a number called the “taxable estate”, which is computed by subtracting from the fair market value of all property owned by the decedent at date of death deductions for funeral and administration expenses, debts, transfers to a spouse, and an exemption amount.
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The second form of estate tax is a “pick-up” estate tax. For states without either an inheritance or “stand-alone” estate tax, the “pick-up” estate tax is a tax imposed and defined to equal the “state death tax credit” allowed for Federal estate tax purposes. For states with an inheritance or “stand-alone” estate tax, the “pick-up” estate tax is defined to equal the amount, if any, by which the “state death tax credit” allowed for Federal estate tax purposes exceeds the inheritance tax. Since a “pick-up” estate tax merely “picks-up” tax that would otherwise be paid to the IRS, it does not increase the total death tax burden on the estate or its beneficiaries.
The third form of estate tax may be called a “decoupled” estate tax.
Congress in the 2001 Act eliminated the “pick-up” estate tax as a source of state revenue for persons dying after 2004. It did so by providing that the “state death tax credit” for Federal estate tax purposes will not apply to estates of persons dying after 2004.
Without a Federal credit for state death taxes, a “pick-up” estate tax will produce no state revenue.
A number of States without either an inheritance tax or “stand-alone” estate tax have already acted (others are considering acting) to avoid the loss of revenue from their “pick-up” estate tax either (1) by “decoupling”, that is, by breaking the automatic connection between their “pick-up” estate tax and the “state death tax credit” allowed for Federal estate tax purposes, or (2) by enacting a “stand-alone” estate tax.
States are decoupling in one of two ways, the first, called “partial decoupling”, and the second, “full decoupling”.
The Federal estate tax law in effect before the 2001 Act increased the exemption equivalent amount (i.e., the amount exempt from the Federal estate tax) from $675,000 in 2001 to $700,000 in 2002 and 2003; $850,000 in 2004; $950,000 in 2005; and $1 million in 2006 and later years. “Partial decoupling” incorporates these exemption amount increases; “full decoupling” does not.
“Partial decoupling” involves amending state law to provide that the estate tax shall equal the “state death tax credit” allowed for Federal estate tax purposes as in effect before the 2001 Act. “Full decoupling” involves amending state law to provide that the estate tax shall equal the “state death tax credit” allowed for Federal estate tax purposes as in effect before the 2001 Act determined without regard to the scheduled increases in the exemption equivalent amount.
The 2001 Act increased the exemption equivalent amount for Federal estate tax purposes from $675,000 in 2001 to $1 million in 2002-3; $1.5 million in 2004-5; $2 million in 2006-8; and $3.5 million in 2009. It increased the exemption equivalent amount for Federal gift tax purposes from $675,000 in 2001 to $1 million in 2002-9.
The “pick-up” GST tax is a tax imposed and defined to equal the state GST tax credit allowed for Federal GST purposes. Since a “pick-up” GST tax merely “picks-up” tax that would otherwise be paid to the IRS, it does not increase the transfer tax burden on the donor, trustee, or transferee.
The 2001 Act eliminated the Federal credit for state GST tax for transfers after 2004. Without a Federal credit for state GST tax, a “pick-up” GST tax will produce no state revenue.
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States have responded to “repeal” of their “pick-up” GST tax as they have to repeal of their “pick-up” estate tax. Some have decoupled; others plan to decouple; others have done nothing.
The GST exemption for Federal GST tax purposes was $1,060,000 in 2001; $1,100,000 in 2002; and $1,120,000 in 2003. Beginning in 2004 the GST exemption will equal the estate tax exemption equivalent amount.
Tennessee’s Wealth Transfer Taxes: Relevant Provisions, Comments and Observations, and Recommendations for Discussion
Inheritance Tax:
Relevant Provisions:
Tennessee’s inheritance tax is imposed on the decedent’s “Net taxable estate” at rates ranging from 5.5% of the first $40,000 of net taxable estate to 9.5% of net taxable estate of $440,000 and over. Unlike the typical inheritance tax, Tennessee no longer makes any distinction between “Class A” beneficiaries (usually immediate family members) and “Class B” beneficiaries (distant relatives and unrelated persons). Tennessee has one graduated rate schedule that applies without regard to the relationship, if any, between the deceased and the beneficiary.
The formula for computing “Net taxable estate” is as follows:
Gross estate
Less: (1) Deductions, and
(2) Statutory exemption
Equals: Net taxable estate
Generally, “Gross estate” includes the fair market value of all property owned by the decedent at date of death plus certain transfers during decedent’s life. “Deductions” include funeral and administration expenses, debts, gifts to a surviving spouse, and gifts to public, charitable, religious, and educational institutions.
The “Statutory exemption” (which is the same as the exemption for Federal estate tax purposes before the 2001 Act) is as follows:
Date of death Amount
1999 $650,000
2000 & 2001 675,000 2002 & 2003 700,000 2004 850,000 2005 950,000
2006 & after 1,000,000
Page 114 of 118 9. A fair number of populous states that have heretofore relied exclusively on the “pick-up” estate tax have already imposed an estate tax either by decoupling from their “pick-up” estate tax or by enacting a “stand-alone” estate tax.
Comments and Observations:
1. It is likely that no more than 2% of Tennesseans currently pay any state death taxes.
According to IRS figures for deaths occurring in 2001 – the most recent data available – only 2% of persons dying during the year owed any Federal estate tax. Since Tennessee is not known as a particularly wealthy state, it is unlikely that the percent of Tennesseans owing any estate tax is any higher than the national average of 2%. Put another way, 98% of Tennesseans are not affected by the state’s death taxes.
2. The median value of an estate subject to tax in Tennessee is probably between $1 and $1.5 million based on the IRS figures for deaths in 2001, which means that the average state death tax rate currently paid is about 8.5% and the effective tax rate is probably no more than 5.5%.
3. It is likely that no more than 2.6% of the 2% of Tennesseans that currently pay state death taxes are subject to tax at the maximum marginal rate of 16% under Tennessee’s “pick-up” estate tax, again based on the IRS figures for deaths in 2001. Only taxable estates of more than $10 million are taxed at the marginal rate of 16%. Since state death taxes will be deductible for Federal estate tax purposes after 2004 (and at least to 2009), the maximum state rate of 16% as adjusted for the savings in Federal estate is probably about 8.5%.
4. Since only the rich pay Tennessee death taxes, and only the very rich pay at a maximum marginal rate of 16% (more like 8.5% when the rate is discounted for the savings in Federal estate tax from deducting the state tax after 2004), the tax burden is placed on those with the ability to pay.
5. As the Federal estate tax is phased out under the 2001 Act (or the law is ultimately amended to provide permanently an exemption amount of $3,500,000 (or higher), the overall death tax burden on Tennesseans that pay state death taxes will fall.
6. Reducing state death taxes on wealthy Tennesseans is fiscally irresponsible if it will cause cuts in services that affect people at all income levels.
7. Reducing a tax that is paid only by wealthy Tennesseans will tilt the state’s regressive tax system even more heavily against low-income families.
8. Reducing death taxes will reduce an important incentive for the rich to give to charity.
10. About half the states that rely exclusively on the “pick-up” estate tax have apparently opted to do nothing. If these states hold the course, their state death taxes will be gone beginning for persons dying after 2004.
11. Some states (e.g., Florida, Alabama, and Nevada) are prohibited by their constitution from decoupling from their “pick-up” estate tax or enacting a “stand-alone” estate tax. A constitutional limitation makes it much less likely that a state will act to impose a death tax on its residents.
Page 115 of 118 13. Admittedly, when the elderly affluent do migrate, Tennessee probably loses considerably more in tax revenue (e.g., Hall income tax, sales tax, property tax, and gift tax) than such persons consume in state and local services. Estate tax:
12. It is well known that to avoid Tennessee’s death taxes some elderly affluent residents have migrated from Tennessee to Florida or other “sun-belt” state that does not have a death tax. But studies have shown that most people choose their residence based on things such as quality of life, closeness to a good job and family members, the state’s climate, and access to services such as health care, and not because of the state’s death tax rate. Tennessee’s decision to retain (or increase) its death taxes will not change these features. In fact, the revenue that the state keeps could help pay for public services that make the state even more attractive, or allow the state to avoid raising other taxes such as the sales tax that affect many more people.
14. Historically, whenever Congress has increased the exemption equivalent amount for Federal estate tax purposes, the Tennessee legislature has increased the “Statutory exemption” for inheritance tax to same amount. But the legislature has not yet acted to increase the “Statutory exemption” for increases in the Federal exemption equivalent amount made by the 2001 Act.
The 2001 Act increased the exemption equivalent amount for Federal estate tax purposes from $675,000 in 2001 to $1 million in 2002-3; $1.5 million in 2004-5; $2 million in 2006-8; and $3.5 million in 2009.
15. When the “Statutory exemption” for inheritance tax purposes is lower than the exemption equivalent amount for Federal estate tax purposes, estate planners often use a “gap trust for surviving spouse” to prevent the lower exemption from generating additional inheritance tax.
15. Tennessee, unlike some 80% of the other states, has never relied on the “pick-up” estate tax as its only tax on transfers of wealth at death. Tennessee has had an inheritance tax for many years. But the inheritance tax rates have been relatively modest, ranging currently from 5.5% to 9.5%. Tennessee’s very affluent, on the other hand, has produced “pick-up” estate tax at graduated rates ranging from 9.6% on taxable estates of roughly $3,100,000 to 16% on taxable estates of $10,400,000 or more.
Recommendations for discussion:
1. Increase the “Statutory exemption” to the current exemption equivalent amount for Federal estate purposes, to wit, $1.5 million for 2004-5; $2 million for 2006-8; and $3.5 million for 2009 and later years.
2. Tax the “Net taxable estate” at graduated rates ranging from 5.5% to 16% (net taxable estates of $10,400,000 or more) by adding additional tax brackets to the existing tax rate schedule.
Tennessee’s estate tax is a “pick-up” tax. It is defined to equal the amount, if any, by which the “state death tax credit” allowed for Federal estate tax purposes exceeds the inheritance tax
Page 116 of 118 Gift tax:
Comments and Observations:
Since no “state death tax credit” will be allowed for Federal estate tax purposes after 2004, Tennessee’s “pick-up” estate tax will in effect be repealed for persons dying after 2004 unless Tennessee decouples by legislative action.
Recommendation for discussion:
Take no action to decouple. Loss of revenue from repeal of the “pick-up” estate tax is being offset in whole or in part by increasing the inheritance tax.
Generation-skipping transfer tax:
Tennessee’s GST tax is a “pick-up” tax equal to the state GST tax credit allowed for Federal GST tax purposes, i.e., 5% of the Federal GST tax.
Comments and Observations:
1. Since no state GST tax credit will be allowed for Federal tax purposes after 2004, Tennessee’s “pick-up” estate tax will in effect be repealed for transfers after 2004 unless Tennessee decouples by legislative action.
2. The GST tax is designed to operate in conjunction with the inheritance, estate and gift transfer taxes to ensure a “once-a-generation” taxation of wealth. Without a GST tax, trusts and life estates can be used to skip one or more generations of transfer taxes.
Recommendation for discussion:
Decouple.
Tennessee’s gift tax is imposed on gratuitous transfers of property by a person while alive. Separate graduated rate schedules apply to taxable gifts to “Class A donees” and to “Class B donees”.
“Class A donees” are the donor’s spouse, lineal descendents, lineal ancestors, siblings, son-in-law, daughter-in-law, step-child, and nieces and nephews if the donor has no lineal descendents. “Class B donees” are all other persons.
Gifts to Class A donees (other than a spouse) are taxed at rates ranging from 5.5% on the first $40,000 of taxable gifts to 9.5% on taxable gifts over $400,000. Gifts to Class B donees are taxed at rates ranging from 6.5% on the first $50,000 of taxable gifts to 16% on taxable gifts over $200,000.
The amount of taxable gifts to Class A donees is determined generally by subtracting from the fair market value of the gifted property (1) an annual exclusion of $11,000 per donee, and (2) if
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gifts were made to a spouse, the marital deduction (generally, 100% of the value of property given to a spouse).
The amount of taxable gifts to Class B donees is determined generally by subtracting from the fair market value of the gifted property (1) an annual exclusion of $3,000 per donee, and (2) the charitable deduction if gifts were made to churches, schools, hospitals, public charities and other organization exempt from tax under Section 501(c)(3) of the Internal Revenue Code.
The annual exclusion for gifts to Class A donees is adjusted periodically for inflation, but the annual exclusion for gifts to Class B donees is not.
By election, gifts made by the donor and spouse to third parties may be considered as being made one-half by each. By electing to split gifts, each donor is entitled to a separate annual exclusion of $11,000 per Class A donee and $3,000 per Class B donee, and each donor takes into account only one-half total taxable gifts in applying the progressive gift tax rates.
Comments and observations:
1. Tennessee is one of only four states in the country that has a gift tax.
2. Tennessee’s inheritance tax and gift tax are not one integrated transfer tax system like the Federal gift and estate tax. Tennessee’s inheritance tax and gift tax are separate and distinct taxes, governed by different rules and different tax rates.
3. Unlike the Federal gift tax, the Tennessee gift tax is not a tax on cumulative lifetime gifts. Prior years’ taxable gifts are not part of the calculation of Tennessee gift tax for the current year. Accordingly, since gifts made in the current year are not “stacked” on top of prior year’s taxable gifts, there is no cumulative effect in computing the gift tax under the Tennessee gift tax system as there is under the Federal gift tax system.
4. The inheritance tax does not distinguish between classes of beneficiaries. The gift tax does.
5. Gifts during life to non-relatives and remote family members (i.e., “Class B” persons) are taxed more harshly than gifts to the same persons at death. Currently, the rate schedule that applies to transfers at death ranges from 5.5% to 9.5%. The rate schedule that applies to transfers during life ranges from 6.5% to 16%. The higher gift tax rates operate to discourage lifetime transfers of wealth to non-relatives and remote family members and in doing so prevents the State from collecting a wealth transfer tax until the owner dies.
6. Gifts during life to “Class B” persons are taxed more harshly than gift during life to “Class A” persons as a result of the lower un-indexed annual exclusion. Again, this feature of the gift tax operates to discourage gifts to Class B beneficiaries (and collection of a wealth transfer tax by the state) until the owner dies.
7. Tennessee gift tax does not apply (a) to tuition payments made directly to an educational institution on another’s behalf, or (b) to payments made directly to the service provider for medical care of another person.
8. The 2001 Act retains the Federal gift tax but caps the exclusion amount at $1 million for 2002 and subsequent years. Gifts made after 2009 are taxed at rates ranging from 18% of the first $10,000 of taxable gifts to 35% of taxable gifts over $500,000.
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Recommendations for discussion:
1. Eliminate all distinctions between gifts to Class A persons and Class B persons.
2. Integrate the gift and inheritance tax systems.
3. Tax cumulative gifts that exceed the Federal exclusion amount.
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