State-Shared Taxes in Tennessee

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)

State-Shared Taxes in Tennessee A Long History in Tennessee • The sharing of taxes in Tennessee is as old as the State’s 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 The Tennessee Advisory Commission on Intergovernmental Relations

State-Shared Taxes in Tennessee Year Created and Year Current Formula Instituted The Tennessee Advisory Commission on Intergovernmental Relations

State-Shared Taxes in Tennessee Distribution Recipients and Basis of State-Shared Taxes Sources: TCA and TN Department of Revenue The Tennessee Advisory Commission on Intergovernmental Relations

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 The Tennessee Advisory Commission on Intergovernmental Relations

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 Tennessee’s 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 The Tennessee Advisory Commission on Intergovernmental Relations

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 The Tennessee Advisory Commission on Intergovernmental Relations

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%) The Tennessee Advisory Commission on Intergovernmental Relations

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. The Tennessee Advisory Commission on Intergovernmental Relations

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 The Tennessee Advisory Commission on Intergovernmental Relations

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) The Tennessee Advisory Commission on Intergovernmental Relations

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. The Tennessee Advisory Commission on Intergovernmental Relations

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 Sources:TML; UT CTAS The Tennessee Advisory Commission on Intergovernmental Relations

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 governments—both cities and counties—have 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) The Tennessee Advisory Commission on Intergovernmental Relations

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.) The Tennessee Advisory Commission on Intergovernmental Relations

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. The Tennessee Advisory Commission on Intergovernmental Relations

State-Shared Taxes in Tennessee