The controversial tax loophole for so-called family owned non-corporate entities, aka real-estate tycoons in business with their relatives, is costing the state government $25 million annually, and fully one-fifth of these tax dodgers live outside Tennessee. That's according to a new report from the Bredesen administration, which is asking the legislature to close the loophole. Today's report says the loophole is "making Tennessee a tax haven for out-of-state, wealthy investors who want to shield their commercial property investments from taxes." Also in the report: The loophole lets more than 3,200 entities shield more than $5 billion in commercial real estate properties from franchise and excise taxes. On average, each of these entities controls more than $1.6 million worth of commercial property. The report is a direct attack against counter arguments mostly made by Republicans but also some Democrats, notably House Democratic leader Gary Odom, that closing the loophole amounts to a tax increase on small family owned businesses. Only 247 of the 3,235 businesses taking advantage of the loophole own properties with appraised values of less than $100,000, the report says. The administration says it would consider exempting businesses with appraised values of less than $250,000. That's 712 businesses. The report also includes a long list of similar loophole-closing measures enacted by the legislature with bipartisan support since 2003. The Q&A with Farr: Q: What's the bottom line of your report? Farr: It's a loophole that has no underlying rationale. ... You don't create exemptions based on somebody's bloodline. ... That's what we've created here in the state of Tennessee. Q: That's a philosophical argument. But you can't argue with the fact that you're talking about raising taxes for somebody in the state, and that's going to be bad for the economy. Farr: Well, you can say that. I would reply, how is it you can justify over 200,000 businesses competing in a commercial marketplace and paying their fair share of franchise and excise taxes when 2,600 people competing in the same marketplace benefiting from all the same services don't pay tax simply because they're wealthy or they can go into business with wealthy family members. Q: What are the economic arguments for this? Farr: In my mind, a tax increase is increasing tax rates or taxing an item that hasn't been taxed before. This legislature, in broad bipartisan fashion, and there's pages of examples in this report, has overwhelmingly voted to close loopholes and shore up and protect Tennessee's tax base. In none of those previous instances have they called that a tax increase. If you total up the fiscal notes on all these bills that have received broad bipartisan support there's over $177 million worth of base preservation. In my mind, you do things like this to ensure that you don't have to enact a tax increase. Or look for new sources of revenue. If every body pays their fair share, then Tennessee should have plenty of revenue to fund the services of state government. But when you create these loopholes, people are going to exploit them. You're going to undermine your tax scheme and eventually they're going to clamor for a rate increase or a new type of tax and that's not good for anybody. Q: Ramsey says that if you change this law then all these current FONCEs will just switch over LLPs to general partnerships. Is that realistic? Do you think that would happen? Farr: No. Businesses that are currently structured as a FONCE will have the option to forgo limited liability protection and not be subject to franchise and excise tax, and some people will do that. But quite frankly, limited liability protection is very valuable, and we think a large majority of taxpayers will pay for the privilege of limited liability protection. If you own an apartment where hundreds of people live, if there's a fire and somebody dies, you're going to want your loss to be limited to that investment in that apartment building. You could lose your house, all of your money and not just what you've invested in that apartment building if you don't have limited liability protection. So to say that people are going to give up limited liability protection to save on franchise and excise taxes, I think is very unrealistic. Q: Would you say Tennessee has become a tax haven? Farr: I would. Tennessee has created a loophole and when you create a loophole like this people are going to exploit it, including Tennesseans and non-Tennesseans. The fact that fully 20 percent of the people who benefit from this exemption are not Tennessee residents shows that we have made Tennessee a tax haven state. Part of what disturbs me is the reason their property is valuable is because Tennessee taxpayers create the business environment that makes their buildings valuable, Tennessee renters are paying rent to them and all of that money is just leaving the state, and they're not contributing one dime toward the services that make their property valuable. Q: Given all these fabulous reasons that you give for closing this loophole, why are so many people opposed? Farr: My hope would be that if they read this report with an open mind that there will not be a loud cry of opposition. Q: You know they already know all this stuff or they know the general picture. Farr: The fact that this has been labeled, and I believe incorrectly, as a tax increase in the press, there are some members who will not touch anything that says tax increase with a 100-foot pole. We've tried to lay out very clearly in this report that this is not a tax increase. It's preserving our tax base and our tax structure. They have all voted on similar measures that raise similar amounts of money and hopefully that will allow those people to be able to vote yes for what's a positive change. Q: Or you may have just handed them a lot more fodder for negative TV ads. Farr: A lot of these votes were unanimous. So every member in both parties except for brand new members in the legislature have voted for similar measures before. Q: Do you think the fact that developers give campaign cash is influencing legislators? Farr: I will say that we have taken on all types of business groups over the years in trying to close loopholes and preserve our tax base, and taking on business lobbies we've been very successful. Taking on individual wealthy Tennesseans is a big challenge. Hopefully when the information is out there, the legislature will do the right thing.