May 12, 2008

Bredesen Pushes Tax Increases on Business, Tax Breaks For Out-of-State Companies

John Rodgers at Nashville City Paper has a wonderful story today exposing how the Bredesen administration is once again using the innocuously named "technical corrections" legislation dealing with the state's tax code to offer potentially millions of tax dollars as incentives for corporations to move to or expand in Tennessee.

It's reminiscent of how, three years ago, the administration mislead legislators about one provision in the "technical corrections" legislation, in order to trick the legislature into passing a $64 million giveaway to Nissan without understanding that is what they were doing.

The story also reveals that, as the legislature enters its final week of work, the administration still hasn't made the full "technical corrections" legislation available for public inspection. That's a lousy way to make public policy that could cost taxpayers millions or even tens of millions of dollars in the future.

Not content with just passing a "technical correction" to make it legal for the Department of Revenue to collect a tax on digital downloads that the Department has been collecting illegally since Jan. 1, 2008, Bredesen's Revenue Department has packed as much as $30 million worth of tax increases - plus tax incentives worth unknown millions - into this year's "technical corrections" legislation.

From Rodgers' story:

Each year, there is a Department of Revenue-led tax bill, which closes loopholes that businesses find to get around some of the state's taxes. The legislation is commonly referred to as the "technical corrections bill," and while still being formulated as the legislature comes to a close, is expected to raise $27 to $30 million in taxpayer funds.

Besides those loophole closing efforts, the technical corrections bill has become the vehicle for the administration to offer its incentive packages in their efforts to recruit businesses to Tennessee.

The Department of Economic and Community Development and the Department of Revenue team up and place incentives targeted at specific companies.

"These aren't credits or incentives that some consultant comes and says, 'gee, if you enact this, this will be good for the state," Farr told lawmakers recently. "All of these are tied around projects with actual business people that we have talked to."

To be clear, I'm pleased Nissan moved to Tennessee and chose to build its HQ in my town. It will be an asset to the state and its economy, and the state should have worked to make it happen (although the administration's projection that a 750-employee corporate HQ would generate more than 15,000 jobs in the state always seemed more like after-the-fact marketing spin that hard economic number-crunching). What gives me pause is the secretive way this administration crafts incentives targeting a single company - and how the Bredesen administration has given Tennessee the image nationally as a state only too willing to open its wallet and give taxpayers' money away. It would be better if the state had a comprehensive economic incentives policy drafted with public debate rather than the mishmash that the Bredesen administration has created in secret.

Rodgers' story continues

Farr estimated that the Department of Economic and Community Development has about 50 to 100 companies with various degrees of interest in Tennessee. This lengthy, complicated legislation is traditionally brought forward at the end of the legislative session.

Rodgers's story notes the controversial Nissan gift, and also how the Bredesen administration used last year's "technical corrections" legislation to slap a new tax on propane sold for backyard barbecues. He then notes that "in the state's tight fiscal times, some lawmakers are questioning using tax incentives to recruit out-of-state companies to Tennessee while not offering tax credits to companies currently doing business in the state."

In fact, as Rodgers reveals, the Bredesen administration rejected a health care tax credit for small business, proposed by state Sen. Diane Black, R-Gallatin, which would have helped small businesses keep their workforce covered by health insurance. The administration claims the proposed credit would cost the state $9 million, which it can't afford during this year's fiscal crises, but I'm betting they used static analysis to come up with that figure. How much will it cost the state in the future if small businesses dump their health plans and shift those workers to TennCare? And if they don't get on TennCare, how much will it cost the state when those folks show up at hospital emergency rooms when they're sick?

Those are the kinds of policy questions that there's no time to answer because the administration waits until the very last minute to bring its very complex "technical corrections" legislation forward.

So, no health care tax credit for Tennessee small businesses this year. But, as Rodgers also reveals the Bredesen administration has included a provision in the "technical corrections" legislation that would an existing tax break for family-owned limited liability companies investing in real estate. Killing the tax break would hit those companies with about $15 million in new taxes.

Overall the "technical corrections" legislation would raise an estimated $27-$30 million in new revenue.

New tax incentives for out-of-state businesses, more taxes for existing Tennessee businesses.

Those are not "technical corrections." Those are a policy shift and a passel of tax increases, and the administration is trying to get it passed into law by taking advantage of the rush at the end of session with the legislature working to pass the budget and adjourn.

To be clear, it is not bad for Tennessee to structure its tax code to make it advantageous for companies to locate in Tennessee and employ Tennesseans. It is not necessarily bad for Tennessee to offer specific incentives to attract huge economic development projects like an auto assembly plant. What is bad is for such policy shifts to be rushed past the legislature and the public with minimal to no debate.

Update: There is opposition in the state legislature to that $15 million tax hike on certain family-owned limited liability companies. The first reader comment below the Knoxville News Sentinel story is priceless. The answer is, "because the Bredesen administration never proposes a 'technical correction' to the tax code that reduces revenue, only 'corrections' that raise taxes."

Update: Ben Cunningham is exactly right:

This so-called technical corrections bill is NOT about technical corrections, it is about tax hikes, plain and simple. Governor Bredesen has already said "I'm not going to ask for new taxes to solve this problem." I call on Governor Bredesen to stand by the this no tax hike pledge and oppose these back door tax hikes.