May 6, 2004

Democrats' Stealth Tax Increase on Tennessee Businesses Passes House; Senate Next

Bad news for Tennessee businesses and the Tennessee economy: The state House has voted to take away $75 million Tennessee businesses were set to receive via federal tax cuts.

Gov. Phil Bredesen and the Democratic legislative leadership are one step closer to raising taxes - even though the legislation appears to violate the state constitution, which prohibits the legislature passing retroactive laws. The Bredesen tax increase would be retroactive to July 15, 2002.

A bill that would decouple the state's excise tax depreciation schedule from federal business tax depreciation laws passed the House Thursday by a vote of 58-to-35. The state Senate is scheduled vote on the bill Monday.

If the bill passes the Senate, Gov. Phil Bredesen - who promised to balance this year's budget without increasing taxes - likely will sign it into law, raising state taxes on Tennessee businesses by $75 million.

The bill has been a high priority of the Bredesen administration and the Democratic leaders in the state legislature.

NashvillePost.com (subscription only) reports:

The bill's supporters, mainly Democrats, argue that the measure prevents the loss of $75 million in state excise tax revenue. State officials contend that when federal tax cuts went into effect two years ago they made a drafting mistake that created a loophole allowing businesses to enjoy double depreciation. HB3529 closes that loophole. Bill sponsors argue failing to address the mistake means the state will start next fiscal year's budget with a $75 million hole to fill.

Conservative commentators and organizations including the Tennessee Tax Revolt describe the measure as a $75 million stealth tax increase on small businesses, which would otherwise retain the tax revenue. The Tennessee Chapter of the National Federation of Independent Business also is strongly opposing the bill. Interestingly, the NFIB is the only business-lobbying group in Tennessee appearing to offer any opposition to the bill.

For comments on that, I refer you to Rex Hammock, a Nashville custom magazine publisher and blogger (and HobbsOnline reader) who comments that his 25 employees "were really counting on some new equipment that is being ordered as a result of the targeted tax provision."

The question is, how many businesses in Tennessee will now decide to not invest in new equipment or expand and create jobs if the legislature takes away the tax cut Congress and the Bush administration gave them?

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.

Also, I may post some updates and additional information on this story later this evening. Stay tuned...

UPDATE: Rex Hammock sums up this terrible legislation rather succinctly:

Tennessee lawmakers are one step closer to taking away from small businesses one of the key benefits of last year's federal tax cuts designed to spur investment in capital equipment.

Before Monday, I'll post suggested text for an email you (if you're a Tennessee resident or do business in Tennessee) to send to lawmakers laying out the reasons why this bill is bad for business. (Short version: It's fiscally reckless, bad for the economy, unnecessary and unconstitutional.)