Leaders of the legislative committee that oversees Tennessee’s tax laws say they believe a state Department of Revenue study of a downward spiral in collections from businesses will lead to a Haslam administration push for changes to the state’s franchise and excise levies next year.
“I think you’ll see a ‘technical corrections 2.0’ or something like that,” said Senate Finance Committee Chairman Randy McNallly, R-Oak Ridge.
“Now that we know there’s a problem, we have to logically go through the process of deciding what to do about it,” said House Finance Committee Chairman Charles Sargent, R-Franklin. “It’s a very complicated situation, but I think we’ll get there.”
Under former Gov. Phil Bredesen, the Department of Revenue would annually file a “technical corrections” bill on state tax statutes, typically with the stated purpose of closing loopholes that tax attorneys and accountants had discovered and were using to reduce company tax payments to the state.
The bills and their provisions were often roundly criticized by Republican legislators and Gov. Bill Haslam dropped the practice – and doubtless would avoid using the term “technical corrections” in any future endeavor.
But state collections in the current fiscal year are $222.4 million below projections when made when the current budget was adopted in April of 2013 with most of the shortfall coming in franchise and excise collections. That has led to state budget cuts, both in the current year and for the next fiscal year, starting July 1. One casualty was pay raises for teachers and state employees that Haslam planned in February but scrapped in April after tax collection data was updated.
The franchise tax is a levy on the either the company’s net worth or its properties held in Tennessee, whichever is greater. The tax rate is 25 cents per $100 of that value. The excise tax amounts to a corporate income tax, levied at 6.5 percent. Both involve complicated formulas and a myriad of exemptions.
There have been multiple ideas on what is causing the revenue loss – ranging from exploited loopholes to a normal cycle of business ups and downs — and Haslam has ordered the Department of Revenue review to be completed by the year’s end, declaring it premature to speculate in the meantime. The governor says any change must be approached cautiously because a revision to one part of the state tax law can cause “50 other issues” elsewhere in dealing with companies and trying to promote job creation in a “business friendly” atmosphere.
A Nashville tax attorney, writing in the national publication State Tax Notes, contends the problem isn’t really that complicated. Brett Carter cites the relocation in 2012 of McKesson Corp.’s pharmaceutical distribution center from Memphis to Olive Branch, Miss., just across the state line. Using figures from national sources and from from pending lawsuits for tax refunds, Carter calculates that move alone cost the state up to $150 million per year in lost revenue, not just from McKesson but from pharmaceutical companies whose products were being stored in the company’s warehouses, triggering state franchise tax payments for those companies as well when treated as part of property in Tennessee. Haslam and other state officials won’t address the situation because taxpayer records are confidential.
Carter, who was a Democratic nominee for the 6th Congressional District seat in 2010, says Mississippi enacted a special tax break benefiting McKesson and the drug companies, and Tennessee was thus “outmaneuvered.”
McNally and Sargent said in separate interviews the McKesson situation may well be part of the shortfall in tax collections, but by no means all.
“My assessment is that it’s probably part of it and it could be a major part of it,” said McNally. “There may be multiple causes.”
There may also be cases of companies “playing games” with various loopholes, he said, and officials “may have been a little over-optimistic on where the economy is going” in making revenue estimates.
He said the federal government has also been “cracking down” on companies overestimating their profits to impress stockholders, filing tax returns based on those estimates, then seeking refunds afterwards. State officials have said some of Tennessee’s revenue shortfall is due to companies seeking refunds from past years.
Sargent noted that he successfully sponsored a bill this year (HB1536) that – though dealing with the separate business tax, not franchise or excise taxes – resolved a dispute over taxation of natural gas marketing companies and kept at last one firm from relocating to Kentucky or Alabama, as it had considered, without revenue loss to the state. That could be the sort of approach used in broader future legislation said.
McNally and Sargent said they would anticipate any changes in business tax laws to be revenue neutral for most companies, though that could vary from one to another. Sargent said that, as a concept, the idea could be to “broaden the base” of those paying the taxes but lowering the rate.
Members of the Tennessee Chamber of Commerce and Industry have been holding talks on “reform” of state corporate tax laws for more than a year, but has not yet given specifics of what that might entail.
Under current law, the formula for calculating Tennessee taxes due is based on a company’s property, sales and payroll within the state with sales being “double-weighted,” or effectively counted twice – a contrast with some other states. Both finance committee chairmen cited that as one possibility for revision in the future.
McNally said the cuts and adjustments made earlier this year to the 2013-2014 budget will result in completing the year with everything in balance when the final figures are tallied – likely not until sometime in August. The possibility of further adjustments in the 2014-15 fiscal year budget is an open question.
Carter suggested that Department of Revenue officials, who have access to data kept secret from the public, should be able to rapidly determine reasons for the shortfall since probably no more than 100 big companies pay most of the franchise and excise taxes. McNally said he’s not sure that’s the case, given the department has a computer system that is “fairly old” and needs to be replaced.