January 31, 2013

The Tennessean: New study calls Tennessee’s tax system ‘unfair’

media mention

Written by Bobby Allyn
The Tennessean

Tennessee is often championed as a low-tax state. But for struggling families, it might not be among the fairest.

As a percentage of income, state and local governments tax low-income families four times as much as the very wealthy, according to a report released on Wednesday by a pro-income tax group.

State and local tax systems are tilted so much toward the top 1 percent of annual income earners that the report listed Tennessee in the “terrible ten” group, along with states such as Florida, Texas and Pennsylvania, for placing an undue burden on families making less than $17,000 a year.

The study examined taxation by income group, combining the overall burden of income, property, sales and local taxes for each state. According to the study’s authors, two facts exacerbate Tennessee’s taxing inequality: the state does not have a personal income tax and has one of the highest sales tax rates in the country.

“Cutting income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside down tax system even more so,” said author Matthew Gardner, who leads the Washington-based Institute on Taxation and Economic Policy.

Gov. Bill Haslam, in his State of the State address on Monday, highlighted Tennessee’s low tax rate among the reasons that the economic recovery has been more striking here than in other states. But he also called for a quarter-percent reduction in the sales tax on food, to 5 percent. During last year’s session, he helped push through a similar reduction in the sales tax on food.

Democrats support such a cut, and say high food taxes and the various tax breaks some upper-income Tennesseans receive create a tax environment that hurts working- and middle-class households.

“The responsibility for paying taxes is being shifted from those who are better off to those who have a harder time just getting by,” said Bill Howell, who runs the Nashville office of Tennesseans for Fair Taxation, a collaborator in the study. “There are states that have tax credits for working families, but they are usually tied to personal income tax. Without one, it’s hard to address the problem.”

The study noted that Tennessee’s corporate income tax, on things like dividend income and retirement savings, is a progressive feature of the current system. Yet the state’s over-reliance on sales tax dollars pinches families who live paycheck to paycheck.

At the other end of the spectrum, families earning more than $372,000 don’t bear the same burden.

Although the uneven taxing is more pronounced in Tennessee than other parts of the country, the trend is the same nationwide, the study found.

Overall, state and local governments tax the poorest Americans twice as much as the most affluent, a fact that led the tax institute to characterize the country’s tax system as “fundamentally unfair.”

“We know that governors nationwide are promising to cut or eliminate taxes, but the question is who’s going to pay for it,” Gardner said. In many states, he said, low income families are “being asked to make up the revenues lost to income tax cuts that overwhelmingly benefit the wealthiest taxpayers.”

The group ranked Tennessee’s tax system the sixth worst in the nation in terms of fairness. In previous years, Tennessee has been in the top five. Howell of Tennesseans for Fair Taxation said this is due to other states passing tax measures similar to Tennessee, and less to do with the state showing improvement.

A proposal for a constitutional amendment banning Tennessee from ever enacting a personal income tax is expected to pass in the state legislator this session. If it passes, citizens will vote on the amendment in 2014.

Republican leaders say the current system creates a business-friendly environment that helps local enterprise flourish. The tax institute, on the other hand, said today’s system frustrates “the ambitions of anyone who happened to be born less fortunate.”