KNOXVILLE — State officials report that Tennessee’s revenues from business taxes such as franchise and excise taxes were $93 million more than expected in April.
University of Tennessee economist Matt Murray said the rise reflects a change last year in state law to broaden business taxes.
“The $93 million reflects a change in that law that effectively expanded the base for the business taxes and corporate taxes in particular,” Murray said. “When the estimates were prepared there was a great deal of uncertainty as to how much revenue might flow in. So there is a bit of a surprise here for the amount of money that is coming in.”
Murray said the unexpected revenues are good news, but not enough to cover the state’s estimated $800 million shortfall.
“That $93 million does not make up for the entire budget shortfall for the fiscal year to date or some of the weakness we’ve seen in some of the other categories particularly in the sales tax,” Murray said . “So while it is very good news for the state’s revenue situation it is not going to be enough to stave off a real serious budget problem.”
In the early 90’s the state passed laws for limited liability corporations, or LLC’s, intended to give tax breaks to self employed persons or sole proprietors by taxing them as individuals rather than businesses.
Murray said many of the state’s larger businesses changed to LLC’s and did not pay business taxes. Since the state also does not have an income tax, these businesses were able to avoid paying any taxes.
Murray said the state lost millions of dollars in tax revenues.
“When the state passed LLC law years ago, many firms changed their status to LLC and ended up getting out of the corporate income tax, and since there is not state income tax they got away without having to pay any taxes,” Murray said.
“Every other state in the country either has an income tax or they plugged that hole immediately when they enacted LLC legislation. Tennessee did not so they had to come back and deal with it later. We plugged the hole last year, but we went several years with the hole unplugged.”
Business taxes are the state’s Number Two source of tax revenue. The state’s top source of revenue is the six percent sales tax. April sales tax collections came in $22.5 million less than expected.