Gov. Bill Lee
Gov. Bill Lee’s proposed franchise tax legislation is facing pushback following discussion in the Senate Finance Ways and Means Subcommittee.
The subcommittee did not take a vote Tuesday but did hear from Department of Revenue Commissioner David Gerregano, who was questioned by Sen. Jeff Yarbro (D-Nashville).
“Aren’t you just giving [businesses] an un-budgeted profit?" Yarbro asked. "Yeah, sure, maybe that leads to investment, but it also could just lead to ‘I’m gonna buy a boat.’”
Currently the franchise tax law is written so that a company pays taxes on its net worth or the amount of property it owns in Tennessee — whichever is greater. The legislation would repeal the property tax portion of the franchise tax. That is estimated to save business owners — and lose the state — about $400 million annually. Gerregano said taxing net worth alone is consistent with how the tax is administered in several other states, and he believes Tennessee is the only state that still has the property tax measure.
The legislation would also establish a fund for reimbursements for any taxpayers who overpaid based on property tax over the past three years.
An amendment was also discussed that specifies that taxes eligible for a refund must be reported between May 1, 2024, and Feb. 3, 2025. The department of revenue would set aside $1.5 billion for those refunds. That number is based on the department’s estimate of all who filed in the eligible tax years.
“The property measure discourages investment in capital in Tennessee because it is in essence a tax on property in the state,” Gerregano said.
The bill sponsor is Senate Majority Leader Jack Johnson (R-Franklin), who spoke about the legislation at a Williamson County event in February.
“Last fall we were approached by a handful of companies who said, ‘We don’t think you’re actually compliant,’” Johnson said. He added that the revenue department then did a “deep dive” with the state attorney general to figure out the best way to revise the tax.
“After realizing there was a significant legal risk in the current statute, the administration weighed options that essentially boiled down to litigation versus legislation,” Gerregano said.
But Yarbro challenged Gerregano on that, asking the revenue commissioner if any states have had tax payouts imposed over $1 billion. Gerregano said there were not any that he was aware of at the time.
“It's hard to imagine that this isn’t going to capture people who either would not sue, would not have claims, would not have damages at all, or would not have damages to the extent that they’re going to be provided dollars here,” Yarbro said.
Without a change to the legislation, Gerregano said the state is also at risk for a court-imposed remedy that could cost more than the policy the legislation creates. Yarbro pointed out in cases where this has been explored, it has typically been left up to the state to figure out a remedy.
“I think we do need to explore what the right way to cut risk is,” Yarbro said. “But I am worried about how we are doing something that's unprecedented in Tennessee history, or maybe national history, that creates an unprecedented windfall for taxpayers.”
As for what might happen if not all refunds are claimed, Gerregano said if there is any leftover from the fund by July 2025, that money will go back into the general fund for the FY26 budget.
The bill was placed back on the subcommittee’s calendar for March 12.
A previous version of this article was published by our sister publication, the Nashville Post.
