Tennessee lawmakers split on how and why to give businesses major tax help under fear of lawsuit

NASHVILLE, Tenn. (AP) — Republicans in the Tennessee House and Senate both plan to offer businesses new tax help worth upward of $1 billion.

But beyond broad strokes, they disagree about how much to award and what the public should know about companies that would get refunds, and what, if anything, they should do to protect the state from being sued for its current franchise-tax law and losing more money than the proposed tax relief.

Overhauling the franchise tax has been one of Republican Gov. Bill Lee’s priorities for months. According to GOP legislative leaders, a law firm representing a large group of businesses contacted the state last fall to question the legality of Tennessee’s 90-year-old franchise tax and demanded a refund. So far, the GOP-controlled Senate has passed something similar to the governor’s proposal, including $1.56 billion in one-time refunds for potentially 100,000 businesses and $393 million in annual tax breaks for a total of $1.95 billion.

Senate Republicans agreed with Lee that the big tax help offers the most protection against what they argue would be a more costly court defeat. They say the attorney general agrees.

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House Republicans have been less convinced. They presented a version this week that included the ongoing tax break. But it also limits the tax refunds to $800 million; requires public disclosure of which businesses get refunds and the amounts; and reduces refund amounts for companies if they already receive certain tax credits.

The bill also sets limits on suing: lawsuits would have to be filed by February 2025, and companies accepting a refund or staying under the current tax structure could not sue.

In a subcommittee meeting Wednesday, House Republican Majority Leader William Lamberth brushed aside arguments that the current tax was at risk of being ruled unconstitutional, noting there is no pending lawsuit. He said the House proposal is “overly generous” and furthers lawmakers’ focus on tax relief.

“I don’t think there’s anything wrong with our franchise and excise tax from a legal standpoint,” Lamberth said. “There are other lawyers that may disagree with that. I feel like we have a policy issue that we are addressing here.”

The debate is complicated by Tennessee’s financial picture.

Tax revenues have become stagnant for several months after years of better-than-expected growth going back into the COVID-19 pandemic. In opposition, Democratic lawmakers have contrasted the election-year big business break with the lack of plans for a grocery tax break, or temporary tax-free “holidays” on groceries and other items implemented in previous years. Legislation containing the governor’s massive school voucher expansion could reach hundreds of millions of dollars in cost, as well, as lawmakers also negotiate on that proposal.

Adding to the governor’s budget proposal released in February, a budget amendment by his team this week would put an extra $130 million into state reserves, while funding more than $140 million in additional initiatives beyond Lee’s budget proposal. Those initiatives range from $6.4 million to cover costs associated with deploying Tennessee National Guard troops to the U.S. southern border with Mexico to $1 million for a Davy Crockett statue on the Capitol grounds. Lawmakers can still adjust spending items.

Heading into the final weeks of legislative session, Senate leaders said there is one nonnegotiable: If $1.56 billion total isn’t set aside for tax refunds, they want the remaining amount stowed away in case of a lawsuit.

“We’ve put together a reasonable plan to compensate the taxpayers who pay this tax under an unconstitutional law,” Republican Sen. Ken Yager said. “And I believe by what we are doing, we have strengthened our position in the worst case.”

At issue are concerns that the state’s franchise tax violates the U.S. Constitution’s Commerce Clause, which bans states from passing laws that burden interstate commerce. Further adding to the legal woes is a 2015 case involving the U.S. Supreme Court striking down Maryland’s tax that the justices ruled had the effect of double-taxing income residents earn in other states.

Details about what specific businesses raised the original legal concerns about Tennessee’s tax have remained hidden. State leaders have refused to disclose what businesses have requested a refund. The original number of the group of businesses who contacted lawmakers last fall was originally disclosed at around 80, but earlier this month, Yager said the law firm represented “hundreds” of individuals.

The issue has been mentioned in court filings before. The car loan financing corporation for Toyota filed a still-ongoing lawsuit in 2022 seeking a $3.3 million refund plus interest, while also claiming the franchise tax violates the U.S. and Tennessee constitutions. However, Republican Sen. Bo Watson has said the Toyota case was not the driver for the proposed tax changes.