Gov. Don Sundquist is willing to make major compromises to see some form of state tax reform pass the General Assembly, but he remains adamant about part of his controversial tax plan—removing sales taxes from grocery food.
Meeting discreetly at the Executive Residence with the state’s legislative leadership Monday, Sundquist acknowledged his sweeping tax reform plan would have to be altered for passage by the General Assembly. But sources who attended the closely-guarded, four-hour session say Sundquist won’t back down on removing sales taxes from groceries. Also, they say, the governor strictly opposes “means testing,” an idea that has taken hold in some legislative quarters—that is, targeting the sales tax exemption on groceries to the working poor. Instead, Sundquist believes, the exemption should apply to every Tennessee taxpayer.
“The governor is absolutely not backing off on that issue,” one source says. “He thinks it just ought to come off. End of story.”
Compromise proposals to Sundquist’s proposed “fair business tax”—which calls for replacing franchise and excise taxes, which many businesses now avoid paying, with a 2.5 percent business tax on payroll and profit over $50,000—will be debated during a special legislative session on taxes starting next Monday.
The real question stumping legislative leaders and the governor’s staff is how to come up with some variation of Sundquist’s tax proposal and remove grocery sales taxes. It amounts to a balancing act in which any new taxes would have to offset the loss of tax revenue. Under Sundquist’s plan—which, as written, is headed for swift legislative defeat—the state would see a net revenue increase of $400 million.
During a media availability session Tuesday, Sundquist acknowledged his plan will have to undergo serious revision, but he stopped short of outlining a possible compromise proposal. “I’m not going to discuss the details of what we might do,” the online Tennessee Politics quoted him as saying. “Suffice it to say that we will have some alternatives either through our sponsors in the General Assembly or through a package that we would propose.”
But one source who attended Monday’s closed-door meeting with legislative leaders told the Scene that the variation of Sundquist’s plan that seemed to get the best reception was one calling for keeping the state’s existing tax structure but expanding business taxes to apply to more of the state’s companies. In addition, of course, the governor would propose repealing sales taxes on groceries. But how to tax payroll is still considered one of the stickiest topics. “I think this is where there’s some confusion,” Tennessee Politics quoted the governor as saying. “You can have as a component of the tax plan some tax on compensation. If you have a corporation and they pay franchise/excise taxes and they have a profit and they pay tax on that profit, that’s one thing. But you have a large segment of the business community that makes no profit as such. Their profit is distributed in their payroll. And so if you don’t tax some of that money that’s compensation among lawyers and doctors and architects and engineers and all these professional groups...they pay no taxes.”
Sundquist made the point that professionals making “a half-million or a million dollars a year” buy a professional license for $200. Meanwhile, he said, the average Tennessee family of four is paying $500 a year in sales taxes on food. In addition, the $200 professional fee is deductible from federal taxes, while the $500 is paid with after-tax income. “So you have to tax compensation as a form of the tax system that will be fair in terms of spreading out the tax burden to everybody,” the governor said.
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