May 5, 2004

Bredesen/Naifeh Stealth Tax Increase Hits Opposition
... Retroactive Tax Increase Likely Violates State Constitution

NASHVILLE - Plans by the administration of Tennessee Gov. Phil Bredesen and leading legislative Democrats to impose a $75 million retroactive tax increase on the businesses of Tennessee - despite promises to balance the budget without increasing taxes - hit a bit of an obstacle today on the floor of the state House.

It turns out, House Bill 3529 may be unconstitutional.

The bill, which would decouple the state's excise tax depreciation schedule from the federal depreciation schedule for capital investment by businesses, has already been criticized as a "stealth" tax increase that is fiscally irresponsible because it would steal money from future fiscal years' budgets, fiscally unnecessary because the state is rapidly piling up a large revenue surplus, and economically irresponsible because it negates the economy-boosting effects of recent tax cuts and tax changes enacted at the federal level by the Bush administration (while adding to businesses' accounting workload). In effect, the legislation raises state taxes on businesses to take away tax cuts they are set to receive from Uncle Sam.

Now, the legislation is being criticized for violating the state constitution's ban on the legislature making retroactive laws. More on that in a moment...

One of my correspondents at the Tennessee General Assembly reports the decoupling bill was heard on the House floor Tuesday and "rolled" to the Wednesday calendar.

During debate Tuesday, Rep. Paul Stanley, a Memphis Republican, offered an amendment that would have the delayed the legislation's effective date for one year, to allow Tennessee businesses to take advantage of the accelerated depreciation this year before Tennessee's depreciation schedules were permanently decoupled.

That amendment was narrowly defeated by a 50-44 vote, which one legislative observer called "an encouraging sign that this bill may not have the legs we thought it did."

Also Tuesday, Rep. Frank Buck, a Democrat from Dowelltown, Tenn., argued that the bill violated a provision in the Tennessee Constitution's Declaration of Rights (Article I, Section 20) that reads in pertinent part "That no retrospective law ... shall be made."

The decoupling bill is retroactive to 2002.

House Majority Leader Kim McMillan, a Clarksville Democrat, argued that the state needs the money - not exactly a strong argument for violating the state constitution's Declaration of Rights that protects the citizenry against retroactive laws.

And Rep. Tommy Head, a Clarksville Democrat who serves as chairman of the House Finance, Ways & Means Committee, also put money ahead of your constitutional protection against retroactive laws when he complained during the floor debate that, "If we don't pass this bill, we'll be here 'til June trying to balance the budget."

Apparently, Rep. Head isn't aware that the state is piling up a revenue surplus this year that may top $200 million, and the latest revenue forecast for the 2004-05 fiscal year raised the revenue estimate by $80 million.

The bill was rolled until Wednesday while McMillan, who along with Naifeh is pushing the tax increase on behalf of the Bredesen administration, to research its constitutionality.

Rep. McMillan, it really is a no-brainer: the legislation is unconstitutional. The legislation applies retroactively as far back as July 15, 2002, which is almost two years ago. The state constitution bans "retrospective" laws. The American Heritage Dictionary defines retrospective as

Looking back on, contemplating, or directed to the past.

Looking or directed backward.

Applying to or influencing the past; retroactive.

Having reference to what is past; affecting things past; retroactive; as, a retrospective law.

You can find all of my past coverage of this proposed tax increase in my Tennessee Budget & Taxes archive of posts. The first post, Bredesen Pushes Tax Increase on Business, was published on April 8.