Tennessee lawmakers are fencing over tax reform amidst a budget squeeze, and the outcome could change the state's market status, according to a report by Dean Witter Reynolds.
Tennessee, one of 10 states that does not impose a personal income tax, faces a $180 million fiscal 1991 budget deficdit and increasing education funding requirements.
Lawmakers are at odds over imposing an income tax, and the ensuing debate will likely bring changes to the way the state collects tax dollars.
"Although the legislative impasse within Tennessee is not as critical as those witnessed in other jurisdictions like New York State or Massachusetts, the ability of the legislature and governot to resolve the state's fiscal imbalance and to address funding requirements remains a credit concern," according to the report.
Legislators have already shot down a proposal by Governor Ned McWherter that would have imposed a 4% flat-rate tax on wage earners, while reducing the state's sales tax, eliminating the sales tax levy on food and basic residential utilities and a 20% reduction in the business franchise tax.
Those measures would have raised $740 million in new revenue for fiscal 1992.
Instead, a proposal to levy a payroll tax of between 1% and 1 1/2 on all Tennessee employees' paychecks is being considered.
Also on the table is a proposal to levy a broad-based intangibles tax that would include stocks, bonds, certificates of deposit, home equity, insurance policies, and pensions accounts with the current 6% interest and dividend tax.
Interest income on in-state municipal bonds would be exempt, while out-of-state municipal bonds would be subject to the tax.
The state Senate proposed a temporary tax hike to avoid budget cuts, but the move was labeled a "band aid" tax measure and struck down by Gov. McWherter, sending the issue back to the drawing board.
Tennessee outstanding debt totals $594 million, which carries the coveted triple-A ratings of both Moody's Investors Service and Standard & Poor's Corp.
The state is undergoing an aggressive infrastructure funding program and plans to issue $400 million of general obligation bond anticipation notes.
Despite the budget deficit and increased funding requirements for education, the Dean Witter report cites the state's conservative reputation and predicts it will see a solid outcome.
It notes, however, that the results of the income tax debate will be the focal point of attention in the years to come.
"Conservative fiscal and debt management will continue to support Tennessee's prime ratings," the report concludes. "We believe that the state will cure its budgetary imbalance and address the need for education reform. Innovative tax and debt programs within Tennessee will take center stage during the 1990s."