In the wake of the 1990-1991 recession, Tennessee was faced with a similar economic situation to most other states in the country. Their revenues fell. Sensibly, the Tennessee legislature responded with a combination of spending cuts and a proposed tax increase in order to balance its budget. The proposed income tax failed spectacularly, however, as did the subsequent proposal to broaden the sales tax to include a greater number of services, including many of the services provided by professionals now subject to the privilege tax. A compromise was reached which involved both an increase to the sales tax rate, and the institution of a professional privilege tax of $200 per year per professional. The latter was doubled to $400 per year per profession in 2002, following yet another recession.
Since the institution of the professional privilege tax, there have been objections and attempts to repeal it. Several Bills have been filed in recent years attempting to abolish the tax, phase out the tax over a number of years, or change the professions subject to the tax. An Amendment to SB556/HB678 filed in 2015 directed the Tennessee Advisory Commission on Intergovernmental Relations (TACIR) to study and publish a report on the history of the professional privilege tax in Tennessee, its intent, other states’ laws imposing a similar tax, and alternatives to the previous legislative proposals to eliminate or phase out the tax. TACIR published its report “Professional Privilege Tax in Tennessee: Taxing Professionals Fairly” in December 2016.
The professional privilege tax currently applies to 22 licensed professions in Tennessee, excluding 57 other licensed professions. The following criteria was considered by the legislature in determining who would pay this tax:
Unfortunately, the tax is still not equitable in its distribution among professionals. For example, the lowest 10% of stockbroker agents earn less than $29,110 per year while the highest 10% earn more than $179,810, even though they both pay the same $400 annual tax. This is particularly onerous given that failure to pay this tax results in administrative suspension of one’s broker license.
The report also notes that nurse anesthetists earn an average annual salary that is greater than 20 of the 22 taxed professions, even though they are one of the professions that is not taxed. As Senator Riley Darnell noted in 1992, “the original intent was to deal with free standing professions, basically a person who could make a living with that license or that certificate, and not someone who generally works for someone else.” Representative Shelby Rhinehart said at the time that they wanted to tax the “big boys” and not the “workers.” For example, physicians and dentists were included in the tax, but not physician assistants or dental hygienists.
A third complaint is that professionals who operate as an LLC, LP, or LLP are required to pay franchise and excise taxes along with the professional privilege tax resulting in double taxation, although this concern could easily be addressed by the passage of legislation allowing for the credit of one tax against the other.
Tennessee is one of only six states that levies a professional privilege tax, including Alabama, Connecticut, Delaware, Montana, and North Carolina, all of which also levy a personal income tax. The details of their professional privilege taxation schemes vary a great deal, both between each other and in comparison to Tennessee. Texas recently abolished their professional privilege tax which was similar to our own. Tennessee and Texas have also consistently ranked among the Top 10 most regressive states in terms of tax policy. That has less to do with their professional privilege taxes, however, and more to do with the fact that poor and middle class citizens must pay a larger percentage of their incomes than the wealthy, who are subject to little to no state income taxes in Tennessee and Texas.
This year, Senator Mark Green has filed SB0015/HB0013 with Representative Jay Reedy which would phase out the professional privilege tax over a four-year period, by reducing the amount of the tax by $100 each year for tax years that begin on and after June 1, 2017. Senator Green is himself a medical doctor subject to paying the professional privilege tax. As the TACIR report notes, phasing out the tax all at once would cost the state an estimated $88 million per year in revenue. If instead the tax were phased out over five years (as originally proposed by SB556), state revenue would decrease by $17.6 million in the first year and by $264 million over five years. Extending the phase-out period over a longer period of time reduces the cumulative loss in revenue, therefore Green’s proposed four year phase out would cost more in revenue than these figures. Nonetheless, only about a third of this tax relief would benefit Tennessee professionals. The rest is paid by professionals who live outside of Tennessee.
So what does $88 million annually buy the people of the State of Tennessee? To put that figure into perspective, we can take a quick look at the State budget. Here are a few items that would be covered by the amount of the annual revenue from the professional privilege tax:
The Adoption Services program provides financial support payments to adoptive parents and treatment and counseling services for families to meet the needs of adopted children. Post-adoption records services are provided to adults who were adopted as youth in Tennessee. Actual budget FY 2014-2015: $88,739,400.00, only $44,195,000 of which is from State funds
The Family Support Services program, which provides a variety of services that support families with children that are at risk of coming into state custody, ensures that children who enter state custody are provided with appropriate treatment and care and assists with adoptions of special needs children; as well as the John S. Wilder Youth Development Center, the Woodland Hills Youth Development Center, and the Mountain View Youth Development Center. Actual combined budgets FY 2014-2015: $82,293,200.00, only $60,796,500 of which is from State funds
The Communicable and Environmental Disease and Emergency Preparedness program works with staff in regional and local health departments to provide epidemiological services. In addition to disease prevention, staff maintains surveillance systems for early detection of bioterrorism and provides emergency support to local health departments and emergency responders. Actual budget FY 2014-2015: $64,228,500.00, only $10,706,000 of which is from State funds
The Family Health and Wellness program provides health services to women of child-bearing age and to children in low-income populations in an effort to reduce maternal and infant mortality and morbidity. This program also provides care and case management services to physically disabled children up to age 21, and funding for the Diabetes Prevention and Health Improvement program. Actual budget FY 2014-2015: $43,148,800.00, only $12,410,900 of which is from State funds
The Driver License Issuance division tests, issues, cancels, and restores drivers licenses, issues handgun carry permits, photo IDs, collects organ donor information, processes voter and selective service registration. Actual budget FY 2014-2015: $48,659,400.00, only $10,916,500.00 of which is from State funds
The FastTrack Infrastructure and Job Training Assistance program provides infrastructure, training, and economic development grants to local governments and businesses for job creation. Actual budget FY 2014-2015: $85,266,800.00, only $64,524,700.00 of which is from State funds
TNInvestco Tax Credits was authorized by TCA 4-28-101 to increase the flow of capital to innovative new companies headquartered in Tennessee in the early stages of development. Actual budget FY 2014-2015: $29,312,400 all of which is from State funds.
These are just a few examples of important Tennessee government programs and their annual costs to taxpayers. As you can see, $88 million in revenue goes a long way toward funding programs which provide real, tangible benefits to Tennesseans. As much as anyone can understand not wanting to pay a tax, professionals in Tennessee already enjoy the very rare benefit of not paying state income taxes, and unfortunately the poor in our State already bear an unjust burden in our taxation. Before we rush to repeal the privilege tax, we might want to consider what we will do when the next recession comes along and we’ve eliminated yet another source of Tennessee tax revenue.