December 30, 2005

The Fix is In

State Rep. Stacey Campfield, R-Knoxville, has a must-read blog post sounding the alert on the latest push by some in the state legislature to make your income subject to taxation - by letting cities and counties levy "payroll" taxes. He also notes a parallel push to allow cities and counties to hit housing developers with higher taxes, which will just drive up the cost of new homes, and a move (reported two weeks ago first on this blog, and four days later by the AP) to end the right of Tennesseans to reject certain tax increases via referendums.

Campfield's comparison of politicians craving more tax revenue to drug addicts craving another fix is spot-on.

The big question: are payroll taxes permitted by the state constitution? Here are the facts:

Article 11, Section 9, of the state constitution says this: The General Assembly shall not authorize any municipality to tax incomes, estates, or inheritances, or to impose any other tax not authorized by Sections 28 or 29 of Article 2 of this constitution.

The language of Article 11, Section 9, clearly states that the legislature is not permitted to authorize municipalities to tax income. Section 9 also serves as commentary on Article 2 Sections 28 and 29, which list a variety of taxes the legislature is authorized to levy. While there may be some wiggle room and gray areas in interpreting what is taxable and what isn't, Article 11 Section 9 makes it crystal clear that in income tax is part of the list of taxes that are "not authorized by Sections 28 or 29 of Article 2."

Bottom line: An income tax is unconstitutional statewide or at the local or county level and not one single pro-income tax elected official, attorney general or activist has ever tried try to explain how an income tax can be constitutional in light of Article 11 Section 9. Tennessee Attorney General Paul G. Summers argues that an income tax is constitutional if the legislation is written properly. But when I confronted him with Article 11 Section 9 during a station break during a broadcast of the Teddy Bart's Round Table radio show a few years ago, Summers had no answer. He promised to get back to me with a thorough response, but never did, and his legal opinion on the constitutionality of the income tax dismisses Article 11 Section 9 with artful but ultimately deceptive spin.

Which leaves only two questions regarding the proposal for local or county payroll taxes. The first question is, is a payroll tax an income tax? If the answer is "yes," then the legislature is clearly and expressly forbidden by the state constitution - Article 11 Section 9 - from passing legislation authorizing cities and counties to levy a payroll tax. If the answer is "no," the question is, does Section 28 or Section 29 of Article 2 of the Tennessee Constitution permit a payroll tax?

I've read it, and a "payroll tax" isn't listed as an authorized tax, though in recent years liberal politicians and the state's pro-income tax attorney general have insisted that the legislature is authorized to tax "privileges" and can tax just about anything it wants if it first defines it in law as a "privilege." Thus, I expect you'll see payroll-tax legislation defining the paying of a payroll in Tennessee as a "privilege."

Test Tax
In addition to being yet another revenue-grab, the payroll tax push is nothing less than a backdoor way of testing the legal theories by which the pro-income tax side intends to seek a court ruling favorable to the income tax. Here's how: If a law is enacted authorizing municipalities to tax payrolls, it will be challenged in court - no matter whether it defines payrolls as a taxable "privilege" or uses some other legal arguments to try to get it to pass constitutional muster, the law's constitutionality will ultimately be argued before the Tennessee Supreme Court.

If the Court rules the payroll tax is constitutional - which it could do as the court is stacked with liberal judges - legislation enacting a statewide general income tax would be written the same way, resistance in the legislature to the income tax would decline and eventual passage would be much more likely. There are a handful of legislators who personally favor the income tax but don't want to vote for it and then see it defeated in court, and have to face voters angered by their pro-IT vote without being able to buy off some of the opposition by spending some of that new tax revenue for pork for the folks back home. If they believe it will survive a court challenge, they're more likely to vote for it.

Bottom line: those pushing to allow cities to tax payrolls are the same people who were last seen trying to ram an income tax through the legislature only, this time, they're trying to do it through the back door.

I've written about the related issues of the constitutionality of the income tax, and of the payroll tax, several times in the past, including here and here.