Senate, House Leaders Struggle With Details On Tennessee’s Billion-Dollar Business Tax Break

Litigation believed likely if House version becomes law.

Photo: What the heck’s in this thing? Sens. Bo Watson, R-Hixon, and John Stevens, R-Hungtindon, review Gov. Bill Lee’s budget amendment. Photo Credit: John Partipilo

By Sam Stockard [Tennessee Lookout – CC BY-NC-ND 4.0] –

House and Senate leaders are battling over the details of a franchise tax tax break, with some predicting litigation is guaranteed if lawmakers approve the House’s shorter rebate time frame and “transparency” provision.

Negotiators, who were set to meet Wednesday night, agree the property value portion of the state’s franchise tax will be eliminated after the Lee administration predicted the state would face “significant legal risk” if it didn’t revamp the tax and offer rebates. Some 80 companies questioned the tax’s property value measure and said it could come under legal scrutiny based on a 2015 Supreme Court ruling out of Maryland. 

Reaching an agreement, though, is proving difficult because House and Senate versions of the bill differ widely.

Tennessee Chamber of Commerce & Industry President and CEO Bradley Jackson said Wednesday a “narrower” disclosure rule could bring the two chambers closer together. 

But, he added, a shorter refund period could lead to lawsuits against the state because under current state law, a three-year “lookback” is set as part of the due process in business tax challenges. 

“The Legislature has long had standing where they do not apply legislation retroactively, and the courts have been pretty clear, ‘You can’t do that. That’s a due process issue,’” Jackson said.

In other words, the Legislature can’t switch rules on franchise and excise taxes, which are based on a property value measure or a net worth measure over three years.

The Senate version contains a three-year rebate that could cost the state $1.6 billion, while the House version stretches back one year and could cost about $700 million. Either way, the state would lose nearly $400 million annually once the tax is cut. 

In addition, the House measure contains a disclosure provision requiring companies that request rebates to be listed on the state’s website along with the amount sought.

Both are major sticking points as lawmakers work toward an agreement. 

Each chamber has passed its version, but if either one refuses to go along, the measure likely will be referred to a conference committee to hammer out an agreement.

Sen. Bo Watson, chairman of the Senate finance committee, anticipates neither side will bend and the matter will end up in a conference committee.

“I’m 100% confident that the tax is gonna be repealed. … The question is how do we deal with companies who have been paying this tax and do we look back three years, two years, one year and do we, outside of our normal policy and process, name who those people are?” said Watson, R-Hixson.

The time frame and “transparency” guidelines remain a “discussion point,” Watson said, even though Lt. Gov. Randy McNally, R-Oak Ridge, has said he believes the House and Senate could agree to a move requiring disclosure of companies that seek a rebate.

Watson called the House’s disclosure provision “a dramatic change” for the Legislature and Revenue Department that could have “potential ramifications.”

He pointed out the three-year refund process is set in state law while the names of companies challenging tax bills are confidential under state law.

But while Watson believes changing those rules could set precedent.

House leaders aren’t ready to budge on their bill

“We’re pretty settled on the House side that if you do apply for this, that there needs to be some transparency,” House Republican Caucus Chairman Jeremy Faison, R-Cosby said Wednesday. “We’re not saying you have to (list) an exact amount you’re given back.”

Faison noted lawmakers still haven’t seen a lawsuit filed over the franchise tax, even if they’ve heard of the potential.

“We’re cutting a tax, and I think the House is putting our best foot forward saying ‘we’re gonna cut the tax. We’ll offer this rebate.’ Other than that, I don’t know that we’re gonna go any further,” Faison said.

Jackson pointed out the House version of the bill contains a section to provide credits to companies, enabling them to choose the measure for paying franchise and excise taxes instead of the state mandating it. 

If the Legislature only repeals the tax, the Senate will push to “put a lot of money aside” because senators believe the state will have to spend heavily for litigation, Watson said.

In that case, the $1.6 billion the Senate plans to spend on franchise tax rebates would not be available in the pending budget, he added. That would be moved to a special account or placed at the state’s “bottom line,” to ensure the Legislature has enough money to handle lawsuits and potential court settlements, Watson said.

“We have been advised that failure to repeal the tax, which we’re gonna do, and failure to follow the normal process for refunds creates an environment where litigation is most likely,” Watson said.

Faison, however, said the House is prepared for legal action and will be armed with “a pocket of money.”

“We feel our chances are good when the judge sees that we stopped (the tax). I don’t know that we’ll ever be sued,” Faison said. 

House Minority Leader Karen Camper, D-Memphis, predicted the bills would go through a conference committee and that the House measure has more room for compromise. She noted the private-school voucher bill could be a factor in the talks, as well.

“The Senate has been dug in on their position” on the franchise tax, Camper said.

Democratic lawmakers saw their efforts rejected to end the property value provision without costing the state $1.5 billion.

About the Author: Sam Stockard is a veteran Tennessee reporter and editor, having written for the Daily News Journal in Murfreesboro, where he served as lead editor when the paper won an award for being the state’s best Sunday newspaper two years in a row. He has led the Capitol Hill bureau for The Daily Memphian. His awards include Best Single Editorial from the Tennessee Press Association. Follow Stockard on Twitter @StockardSam