State-Shared Taxes in Tennessee

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State-Shared Taxes in Tennessee

• A Presentation to the
• House Finance, Ways and Means Committee
• by
• Harry A. Green
• Executive Director
• TACIR
• June 14, 2002
• (Updated June 20, 2002)

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State-Shared Taxes in Tennessee
A Long History in Tennessee

• The sharing of taxes in Tennessee is as old as
  the States Second Constitution (1834) which
  created a Common School Fund
• Early examples of state-shared taxes in Tennessee
  include
• State poll taxes (as early as 1883)
• Auto registration fees, and the gasoline tax
  (1923)
• The original Hall Income (1929) required that 45
  of collections be earmarked for distribution to
  counties and municipalities
•  When first passed, the state sales tax (1947),
  required that a portion of receipts be shared
  with counties for education and that cities be
  given a share based on population

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State-Shared Taxes in Tennessee
Year Created and Year Current Formula Instituted
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State-Shared Taxes in Tennessee
Distribution Recipients and Basis of State-Shared
Taxes
Sources TCA and TN Department of Revenue
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State-Shared Taxes in Tennessee
A System of Cooperative Government

• State-shared taxes
• Provide a means for the state and local
  governments to work together to provide broad
  services
• Promote some degree of equity in the provision of
  local public services
• Promote a state-local highway system
• Help Tennessee remain a low local tax state,
  complementing our low state taxes
• Assist local governments in funding state mandates

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State-Shared Taxes in Tennessee
A Major Local Government Funding Source

• In 1999
• State aid (including state-shared taxes,
  education support and other direct grants-in-aid,
  and reimbursements) represented 31 of
  Tennessees local governments revenue
• Tennessee ranked 37th highest among states in
  state aid to local governments
• The amount of money states give to local
  governments varies widely among states due to
  variations in the mix of state and local
  responsibilities, local revenue-raising powers
  and geographic differences

Source State Policy Reports
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State-Shared Taxes in Tennessee

• In Fiscal Year 2001
• Tennessee shared over 741 million dollars with
  its local governments.1
• 276 million was restricted, or earmarked (local
  governments had to use the money for specific
  purposes).
• 465 million was unrestricted, or not earmarked.

1Includes 98 million in Beer Wholesale Tax
Revenue
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State-Shared Taxes in Tennessee
State-Shared Growth, 1998-2000

• The state-shared taxes with the highest average
  annual rates of growth are
• Franchise and excise taxes (combined) 6.5
  percent
• Sales and use taxes 6.0 percent
• Hall income tax 5.8 percent
• Motor vehicle fuel taxes 3.7 percent
• The gasoline tax, which represents the single
  largest shared tax source, exhibits little growth
  over time (1.5)

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Selected Characteristics of State-Shared Taxes
1 The Department of Revenue reports distributions
for these two taxes as one category. 2 Due to
data limitations, TACIR could not calculate a
separate volatility or growth rate for the
Corporate Excise Tax. The respective volatility
and growth rates for the Corporate Excise Tax
combined with the Franchise Tax were 7.4 and
6.5. 3 Does not include 2.47 million in
municipal distributions to non-municipalities.
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State-Shared Taxes in Tennessee
Distributions of State-Shared Taxes and Percent
of State Total to Local Governments, Fiscal Year
2001
Sources TN Department of Revenue and TN Malt
Beverage Association
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State-Shared Taxes in Tennessee
Local Reliance Varies

• In fiscal year 1995, state-shared taxes
  (excluding highway and beer wholesale taxes)
  equaled
• Counties 3 percent of own-source revenue
• Cities Over 10 percent of own-source revenue
• The ratio of state-shared taxes to local
  own-source revenue varied substantially
• Counties 1.4 to 35.5 percent
• Cities 2.9 to 1,256.7 percent (2.9 to 142.1
  percent for cities with property taxes)

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State-Shared Taxes in Tennessee
Local Reliance Varies

• Six counties received state-shared tax amounts
  equal to more than 10 percent of their own-source
  local revenue.
• 63 cities received state-shared tax amounts equal
  to 50 percent or more of their own-source local
  revenue. Twenty-seven of those cities received
  amounts from state-shared taxes that exceeded
  their total own-source local revenue.

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State-Shared Taxes in Tennessee
If Revenue Sharing is Eliminated

• Impact of replacing lost revenue with local
  property tax increases
• 185 municipalities would need to double their
  current property tax rate (at a minimum) to
  maintain their current level of spending.
• 36 counties would need to increase their property
  tax rate by over 50 percent
• 16 counties would need to increase their rate by
  over 75 percent
• six counties would need to more than double their
  current rate

SourcesTML UT CTAS
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State-Shared Taxes in Tennessee
Conclusion

• The state-shared tax system in Tennessee is vital
  to the orderly and sustained delivery of public
  services throughout the state
• The impact of eliminating, or drastically
  reducing, state-shared taxes in a single year
  would be severe and very disruptive of local
  public services
• Local governmentsboth cities and countieshave
  been raising property taxes during the past 3
  years. As a result, it will be difficult for
  many local governments to absorb funding
  reductions either in education or state-shared
  taxes
• Pending new road projects and maintenance of
  county roads and city streets would be eliminated
  or deferred (255 million reduction)

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State-Shared Taxes in Tennessee
Conclusion

• City and county governments can not readily
  absorb a reduction of 483 million in general
  purpose funding
• Debt service on outstanding bonds and notes could
  be affected
• The elimination or reduction of state-shared
  taxes would have a ripple effect on the economy
  (loss of jobs, cancellation of contracts, etc.)

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State-Shared Taxes as of Total State
Collectionby Tax, Fiscal Year 2001
1 The Department of Revenue reports distributions
for these two taxes as one category. Source
TACIR calculations using TN Department of Revenue
and TN Malt Beverage Association data.